Forex Trading Guide: UK Retail Sales Report (Oct.)

Hello, forex buddies! Central bank events aren’t the only catalysts than can potentially rock this forex trading week. We’ve also got a bunch of economic indicators lined up, with the UK retail sales report being one of them (Nov. 19, 9:30 am GMT). And it just so happens that I’ve got a handy Forex Trading Guide for that event.

Oh, for the forex newbies out there, the retail sales report is the primary gauge for determining the strength of consumer spending in the British economy, which is why it’s extremely important to both forex traders and policy makers alike.

What happened last time?

  • Headline reading m/m: 1.9% vs. 0.4% expected, -0.4% previous
  • Core reading m/m: 1.7% vs. 0.4% expected, -0.7% previous
  • Headline reading y/y: 6.5% vs. 4.8% expected, 3.5% previous
  • Core reading y/y: 5.9% vs. 4.7% expected, 3.2% previous

The September period’s headline reading for retail sales volume printed a month-on-month increase of 1.9%, which is ginormously better than the expected 0.4% increase. The upside surprise caught many forex traders and analysts off guard, including myself. If y’all still recall, I noted in my previous Forex Trading Guide for this event that leading indicators were not very optimistic overall, so I wasn’t really expecting too much.

Anyhow, the details of the report also show that average store prices fell by 3.6% year-on-year, which is the “15th consecutive month of year-on-year price falls” and is probably one of the reasons why Britons bought more stuff, with the total amount spent in retail stores increasing by 2.7%.

Interestingly enough, predominantly food stores, which account for around 41% of the total amount spent in the retail industry, saw a 1.1% increase (-1.3% previous) in terms of amount spent. In addition, the aforementioned stores also saw a 3.2% increase (0.8% previous) in sales volume, so the surge in retail sales appears to have been driven mainly by sales of food, alcoholic drinks, and tobacco.

But what sparked this increase? Well, according to the report, “Feedback from food stores suggests that some of the growth seen this period can be attributed to promotions centred around the Rugby World Cup.” Makes sense, I guess. After all, England was the host nation.

What’s expected this time?

  • Headline reading m/m: -0.2% expected vs. 1.9% previous
  • Core reading m/m: -0.5% expected vs. 1.7% previous
  • Headline reading y/y: 4.5% expected vs. 6.5% previous
  • Core reading y/y: 4.0% expected vs. 5.9% previous

For the October period, the headline reading for retail sales volume is expected to contract by 0.2% month-on-month. That’s to be expected, I suppose. As I wrote in the conclusion for my UK economic review, the jump in retail sales volume due to the Rugby World Cup is most likely unsustainable, so we’ll probably see some normalization in the coming months. And I guess most economists and forex traders are expecting the normalization process to start already.

Looking at related and leading indicators, the GFK consumer sentiment survey slipped to 2.0 points (3.0 previous), but it still signals optimism since the reading is above zero. Apparently, the downtick was attributed mainly to concerns over the general economic situation in the UK. And it also seems like Britons were less keen on spending since the “Major Purchase” index dropped to 7.0 points from 14.0 points previous.

Moving on, CBI’s distributive trades survey showed that only 19% of the retail firms surveyed in October said that sales volume were up when compared to last year, which is a sudden drop from last month’s 49%.

The BRC-KPMB retail sales monitor is also reporting a 0.2% drop (2.6% previous) in annualized retail sales. As a possible explanation for the slowdown, commentary from Helen Dickinson, BRC Chief Executive, noted that “some shoppers may be holding out in the hope of some great deals at the end of November,” referencing to the so-called “Black Friday” buying frenzy.

Overall, related and leading indicators seem to be pointing to a downturn in retail sales volume. But also remember that the coverage of the retail sales readings for the September period is only from August 30 to October 3 whereas the Rugby World Cup lasted from September 18 to October 31, so there’s still a chance for an upside surprise.

How might the pound react?

Last time around, forex traders responded to the overwhelmingly positive readings by initially buying up the pound across the board. The sellers ultimately won out in the end for most pound pairs, however, probably because forex traders took a look at the details of the report and found out that the Rugby World Cup was a major factor for the better-than-expected readings, which means that the jump is most likely unsustainable.

GBP/USD 15-Minute Forex Chart

GBP/USD 15-Minute Forex Chart

For the upcoming report, just remember that the pound usually has a knee-jerk reaction to the readings depending on whether they meet, beat, or are beaten by expectations – rallying when the actual readings are better-than-expected, selling off when they’re worse-than-expected, and relying on overall sentiment when the readings are mixed or come in as expected.

Speaking of overall sentiment for the pound, the pound seems to be trading sideways when paired with the other higher-yielders (AUD & CAD), with the exception of NZD, while doing well against the lower-yielders (JPY, CHF, EUR) other than USD.

This is probably due to the prevailing risk-on sentiment in the markets. So if you expect the actual readings to disappoint, then it would probably be safer to trade the pound against the higher-yielders, but if you expect an upside surprise then trading the pound against the lower-yielders seems to be the better option. And just in case you expect an upside surprise, just remember that the BOE is no longer as hawkish as before and yesterday’s CPI readings, while within expectations, aren’t really that optimistic, so you probably shouldn’t expect too much.

How do you think the UK’s October retail sales data might turn out? Got any trade plans in mind? Why not share what you think in the poll or comments section below.