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Hello there, forex chaps! Looking for a potential catalyst for the pound are ya?

If you are, then tomorrow’s retail sales report (March 24, 10:30 am GMT – DST on) might just catch your fancy, yeah? If it does, and you’re lookin’ to trade this event, then this Forex Preview will help ya get up to speed.

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 the sales volume and sales value at the retail level.

This report is important to forex traders because it is the primary gauge for the level of consumer spending in the British economy.

And consumer spending, in turn, has been the backbone of the British economy. Okay! On with the show!

What happened last time?

  • Headline retail sales m/m: 2.3% vs. 0.8% expected, -1.3% previous
  • Headline retail sales y/y: 5.2% vs. 3.6% expected, 2.3% previous
  • Core retail sales m/m: 2.3% vs. 0.7% expected, -1.3% previous
  • Core retail sales y/y: 5.0% vs. 3.4% expected, 1.8% previous

The retail sales report for the January period was actually pretty good, at least on the surface. Both the year-on-year and month-on-month headline readings for the retail sales volume exceeded market expectations.

And the same can be said for the core readings. Moreover, the amount spent by consumers increased 2.4% year-on-year (2.6% previous) and 2.3% month-on-month (-1.0% previous).

Not only that, all store types reported higher retail sales volume in January while only petrol stations reported a decrease in the amount spent. Overall, the retail sales report, uh, reported that consumer spending was very robust, which is a good start for Q1 2015.

The only joy killer was the average store prices since it slumped by 2.6% year-on-year (-3.2% previous), which is the 19th consecutive fall.

This is pretty bad because the U.K. has been having inflation problems, but the BOE expects that deflationary pressures from lower commodity prices will fade over time, which is why the BOE is still looking to hike rates but is reluctant to do so just yet.

Anyhow, forex traders usually react to a better-than-expected retail sales report by buying up the pound or dumping it when the readings fail to meet market expectations.

As such, the forex reaction to the previous retail sales report was rather unusual because the pound broadly weakened across the board.

GBP/USD: 15-Minute Forex Chart
GBP/USD: 15-Minute Forex Chart

What gives? Well, that was probably because of the disappointing drop in average store prices since that could mean that inflation will stay lower for longer, so the BOE will also be forced to hold off on hiking rates for longer.

It’s also highly likely that Brexit fears were gripping the hearts and minds of forex traders. After all, Day 1 of the E.U. Summit to renegotiate the United Kingdom’s relationship to the rest of the E.U. turned out to be a dud, and Day 2 was underway at the time.

Of course, we now know that the E.U. Summit ultimately succeeded and a referendum date was set. And there were even rumors during the U.S. session that a deal has been made, allowing the pound to climb higher.

What can forex traders expect this time?

  • Headline retail sales m/m: -0.7% expected vs. 2.3% previous
  • Headline retail sales y/y: 3.9% expected vs. 5.2% previous
  • Core retail sales m/m: -1.0% expected vs. 2.3% previous
  • Core retail sales y/y: 3.5% expected vs. 5.0% previous

For the upcoming retail sales report, the headline and core readings for retail sales volume are expected to deteriorate versus the readings for the January period, with the month-on-month readings, in particular, is expected to contract.

Looking at some of the leading indicators, the Markit/CIPS manufacturing PMI reading for February dropped to 50.8 (52.9 previous), which is a 34-month low.

According to commentary from the report, both the “capital and consumer goods industries saw levels of total new business decline in February, reflecting subdued trends in domestic and foreign demand.”

Not only that, “both input costs and output charges fell further,” which is corroborated by yesterday’s producer price inflation report (PPI), which revealed that output prices or “factory gate prices” fell 1.1% in the year to February, which is a bit worse than the 1.0% drop for the year to January.

In short, retail sales is will likely drop and the same can probably be said for the average store prices.

Moving on, the British Retail Consortium’s (BRC) retail sales monitor for February reported a 0.1% year-on-year increase in February, which is much lower than January’s 2.6% increase.

BRC Chief Executive Helen Dickinson also noted that “February’s slowdown was noticeable across all product categories bar Stationery and Health & Beauty, as Valentine’s Day provided a welcome growth spurt for those retailers well prepared for the occasion.”

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.

Overall, leading indicators seem to support lower retail sales volume, so the expected readings look about right, although there’s also room for a downside surprise.

In addition, there’s a good chance that average store prices will drop again, which will likely disappoint interest rate junkies.

However, do note that wages grew at a faster pace in the three months to January (2.1% vs. 1.9% previous), but it remains to be seen if the higher wages translated to higher consumer spending in February.