EUR/USD: Trading the U.S. Retail Sales Report

Trading the News: U.S. Advance Retail Sales

What's Expected:

Time of release: 05/12/2011 12:30 GMT, 8:30 EST

Primary Pair Impact:EURUSD

Expected: 0.6%

Previous: 0.4%

DailyFX Forecast: 0.6% to 1.0%

Why Is This Event Important:

Household consumption in the U.S. is expected to increase another 0.6% in April, and the ongoing expansion in private sector spending is likely to reinforce an improved outlook for the world's largest economy as it remains one of the leading drivers of growth. In light of the recent developments, the Federal Reserve may continue to raise its fundamental assessment for the nation, and the central bank may look to gradually normalize monetary policy towards the end of the year as growth and inflation gathers pace. However, the protracted recovery in the labor market could lead the FOMC to retain its zero interest rate policy throughout 2011, and Fed Chairman Ben Bernanke may continue to talk down speculation for higher borrowing costs in an effort to encourage a sustainable recovery.

Recent Economic Developments

The Upside

The Downside

The rebound in household confidence paired with the ongoing expansion in consumer credit certainly reinforces an improved outlook for retail sales, and private sector spending may continue to gather pace throughout 2011 as labor conditions gradually improve. However, as the economic recovery slows, subdued wage growth paired with higher consumer prices could dampen private sector spending, and households may look to increase their rate of savings as the economic outlook remains clouded with high uncertainty. In turn, the Fed may retain a dovish outlook for monetary policy over the coming months, and Chairman Bernanke may look to support the real economy throughout the year in order to balance the downside risks for the country.

Potential Price Targets For The Release

How To Trade This Event Risk

Projections for a 10th consecutive rise in retail spending certainly encourages a bullish outlook for the greenback, and price action following the release could set the stage for a long U.S. dollar trade as growth prospects improve. Therefore, if sales increase 0.6% or greater in April, we will need a red, five-minute candle following the report to establish a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance after taking market volatility into account, and this risk will generate our first target. The second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reach its mark in an effort to preserve our winnings.

On the other hand, Americans may have scaled back on spending as they cope with rising commodity prices paired with the ongoing weakness within the housing market, and a dismal sales report could dampen expectations for a rate hike later this year as the central bank continues to highlight the ongoing weakness within the real economy. As a result, if retail spending increases less than 0.3% or unexpectedly contracts from the previous month, we will carry out the same setup for a long euro-dollar trade as the short position laid out above, just in reverse.

Impact that the U.S. Retail Sales report has had on USD during the last month

March 2011 U.S. Advance Retail Sales

Retail spending in the world's largest economy increased 0.4% in March after expanding 1.1% in the previous month to mark the ninth consecutive monthly advance. The breakdown of the report showed demands for furniture rose another 3.6% to lead the advance, with discretionary spending on clothing increasing 0.6%, while gasoline receipts added another 2.6%, led by higher energy prices. The ongoing expansion in private sector consumption certainly reinforces an improved outlook for the world's largest economy as it remains one of the leading drivers of growth, and the Federal Reserve may continue to raise its fundamental assessment for the region as the recovery gradually gathers pace. However, as the central bank continues to highlight the ongoing weakness within the private sector, the FOMC is likely to retain its zero interest rate policy throughout the first-half of the year, and Chairman Ben Bernanke may continue to talk down speculation for higher borrowing costs in an effort to encourage a sustainable recovery. Indeed, the initial reaction to the sales report was fairly mixed, but the U.S. dollar gained ground throughout the North American trade as the EUR/USD ended the day at 1.4442.

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To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com