Forex Preview: U.K. Retail Sales (Mar)

If you’re looking for an opportunity to pillage some pips from the pound, then just know that the U.K.’s retail sales report will be released tomorrow (April 21, 8:30 am GMT). And if you need a quick review on what happened last time, as well as what to expect for the upcoming report, then make sure to catch up with today’s Forex Preview.

Oh, for the newbie forex traders out there, the retail sales report from the Office for National Statistics (ONS) presents the seasonally-adjusted estimates for sales volume at the retail level.

The retail sales report is important to forex traders and decision makers alike because it is the primary gauge for the level of consumer spending in the U.K. economy. And consumer spending, in turn, has been the backbone of the British economy, as well as one of the main drivers for domestic inflation.

Moreover, the minutes of the March MPC meeting revealed that “some members noted that it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted.” The retail sales report is also therefore linked to BOE rate hike expectations.

What happened last time?

  • Headline retail sales m/m: 1.4% vs. 0.4% expected, -0.5% previous
  • Headline retail sales y/y: 3.7% vs. 2.6% expected, 1.0% previous
  • Core retail sales m/m: 1.3% vs. 0.4% expected, -0.3% previous
  • Core retail sales y/y: 4.1% vs. 3.1% expected, 2.1% previous

The retail sales report for the February period was actually pretty good, since the headline reading for retail sales volume surged by 1.4% month-on-month, easily exceeding the +0.4% consensus.

Even better, the surge in February is the first positive reading after three straight months of negative monthly readings. Not only that, all store types also reported higher sales volume.

Year-on-year, retail sales jumped by 3.7%, easily beating the +2.6% consensus, as well as the previous month’s 1.0% increase. In addition, the faster increase in February puts an end to the four months of ever weaker year-on-year increases for both the headline and core readings.

However, not all store types reported better sales volume, since household goods stores reported a 1.9% decrease in sales while fuel stations printed a 0.1% decrease in sales volume. Overall, still pretty good, though.

And since the U.K.’s retail sales report was net positive, pound bulls reacted by buying up the pound across the board.

GBP/USD: 15-Minute Forex Chart

GBP/USD: 15-Minute Forex Chart

However, follow-through buying was not very strong. And that was likely due to the fact that pound bulls already bought up the pound ahead of and after the U.K.’s CPI report, which was also pretty upbeat.

GBP/USD: 15-Minute Forex Chart

GBP/USD: 15-Minute Forex Chart

Moreover, the February retail sales report was released on March 23, so pound bulls were likely wary of adding to their bullish bets, since the Scottish Parliament was expected to vote on backing another Scottish Referendum on March 28 and Theresa May was expected to formally start the Brexit process on March 29.

What’s the consensus this time?

  • Headline retail sales m/m: -0.3% expected vs. 1.4% previous
  • Headline retail sales y/y: 3.4% expected vs. 3.7% previous
  • Core retail sales m/m: -0.5% expected vs. 1.3% previous
  • Core retail sales y/y: 3.8% expected vs. 4.1% previous

For tomorrow’s retail sales report, both the monthly headline and core readings are expected to slip back into negative territory. Meanwhile, both the headline and core year-on-year readings are expected to print weaker increases. In short, the general consensus is that March is gonna be a poor month.

Looking at some of the leading and related indicators, Markit’s manufacturing PMI reading for March fell from 54.5 to a four-month low of 54.2. And according to commentary from the PMI report, the “slowdown was centred on consumer goods producers, with the pace of output growth in that industry only modest.”

Additional commentary from the PMI report, also noted that the “reduced buying power of the Pound has led to the 11th consecutive rise in input costs with consumers feeling the effects in the form of higher prices on the high street,” which led to the weakness in consumer goods production.

Moving on, the British Retail Consortium’s (BRC) retail sales monitor reported a 1% year-on-year decrease in March. Do note, however, that this does not necessarily mean a poor retail sales reading in March, since the BRC retail sales monitor printed a 0.4% fall previously, but headline retail sales surged by 3.4% year-on-year.

Anyhow, the U.K.’s jobs report for March showed that wage growth in real terms (adjusted for inflation) printed a 0.5% increase, after stagnating previously. However, that was due to the large bonus paid to private sector employees, and may therefore be temporary.

If bonuses are excluded, wages actually fell by 0.4% year-on-year, which is the first fall since August 2014. This means that inflation is already beginning to take its toll on the purchasing power of the average Brit. Although it remains to be seen if consumer spending took a hit in March.

Overall, the leading and related indicators are pointing to weakness in consumer spending during the March period.

In addition, BOE MPC member Gertjan Vlieghe warned in his April 5 speech that “The consumer slowdown, which initially did not materialise, now appears to be underway,” adding that the slowdown “is more likely to intensify than fade away.”

BOE Guv’nah Mark Carney agreed with Vlieghe, since Carney said in his April 7 speech that “are some signs of [strong consumer demand] coming off slowly.”

In any case, just remember that with all economic reports, a better-than-expected reading usually triggers a quick rally (for the pound) while a miss generally triggers a quick selloff.

Do note, however, that the pound has already appreciated by a lot this week, thanks to Theresa May’s surprise call for early elections. So unless the retail sales report is really good, there’s therefore a risk that some pound bulls would use the retail sales report as a chance to take some profits off the table to avoid weekend risk.