Forex Trading Guide: U.K. Retail Sales Report (August)

Did y’all catch that surge in volatility after the U.K. jobs report came out? If not, worry not, because we still have another potential market-mover lined up, and I even made y’all another handy-dandy Forex Trading Guide for it.

This time, I’ve got one for the upcoming retail sales report that’s scheduled to come out on September 17 at around 8:30 am GMT. Make sure to mark your forex calendars for this event, alright?

What’s this report all about?

The Office for National Statistics (ONS) releases a monthly report which presents the seasonally-adjusted estimates for the sales volume and sales value at the retail level. Forex traders care about this report because retail sales data acts as the prime indicator for gauging the level of consumer spending (a.k.a. household consumer expenditure) in an economy. And consumer spending, in turn, is the backbone of the British economy since it tends to remain steady while other components tend to fluctuate, as can be seen on the chart below (it’s the black bar).

Forex - U.K.GDP Contributions

What happened last time?

In my previous Forex Trading Guide for the U.K. retail sales report, I mentioned that I wasn’t very sure if the actual readings will meet the market’s expectations. And as it turned out, I was right since the July retail sales report showed that the headline reading for sales volume only increased by 0.1% month-on-month (+0.4% expected, -0.1% previous) and 4.2% on an annualized basis (+4.4% expected, +4.2% previous) due to lower sales volume from predominantly food stores, textile, clothing and footwear stores, and petrol stations.

Overall, the readings were actually mixed, though, since the core reading printed a 0.4% monthly increase as expected (-0.3% previous), and the yearly reading was within expectations as well, with a 4.3% increase (4.1% previous). In addition, the total retail sales value in July 2015 increased by 1.0% when compared with July 2014, but the month-on-month reading saw a 0.2% decrease.

What is expected this time?

For the upcoming retail sales report, the consensus among most economists and forex traders is that the headline reading for sales volume will advance by 0.2% month-on-month (+0.1% previous) and 3.8% year-on-year (+4.2% previous). The core reading, meanwhile, is expected to only show a 0.1% monthly increase (+0.4% previous), but it’s still expected to show a respectable 3.8% annualized increase (+4.3% previous).

Looking at related economic indicators, an increase seems to be the most likely direction, at least for the headline reading, since the GFK consumer confidence index climbed back to 7.0 points in August (4.0 previous), which indicates improving consumer confidence and potentially higher levels of consumer spending.

The retail price index (RPI) for August also printed a better-than-expected 1.1% increase (+0.9% expected, +1.0% previous), which hints at potentially higher levels of consumer demand.

The British Retail Consortium’s (BRC) retail sales monitor for August reported a 1.0% year-on-year decrease (+1.3% previous), though, but the reading is not seasonally-adjusted and the decline was due to the Bank Holiday falling on a September reporting period, which means that back-to-school related purchases that normally fell on August went to September instead.

Oh, for the forex newbies out there, the BRC represents around 80% of retail trade in terms of turnover, which makes it one of the biggest trade associations in the U.K. and gives its reports some weight. Some of its more famous members include Mcdonald’s, Burger King, Gap, and Starbucks.

How might the pound react?

The readings were mixed the last time around, but most forex traders probably had their sights on the monthly headline readings since their knee-jerk reaction was to dump the pound due to the less-than-expected results.

GBP/USD 15-minute Forex Chart

GBP/USD 15-minute Forex Chart

Forex traders then had a change of heart after they digested the fact that the current readings were still showing an improvement when compared to the previous readings, and besides, the long-term trend is still up since the year-on-year estimates have been growing for 28 consecutive months already.

After that, follow-through action was dictated by market sentiment, and risk aversion was the name of the game at the time due to the market’s disappointment with the FOMC meeting minutes and the crumbling Chinese stock market, which later evolved (or devolved) into the August 24 global market meltdown. As a result, the pound gained some ground against the Greenback and the high-yielding comdolls while getting a beat-down from the safe-haven currencies such as the yen and the Swissy.

GBP/JPY 15-minute Forex Chart

GBP/JPY 15-minute Forex Chart

For the upcoming report, just keep in mind that forex traders usually have an initial knee-jerk reaction to the actual readings depending on the market’s expectations, so actual readings that beat expectations generally cause the pound to rally while actual readings that fail to meet expectations usually cause a sell-off.

As for the follow-through action, that usually depends on the prevailing market sentiment. The Fed will be announcing a rate hike (or not) on the same day, though, so perhaps forex traders would be avoiding GBP/USD ahead of that event, but the other pound pairs should be okay.