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Hello, forex friends! If you’re looking for a likely catalyst to pump some volatility into Greenback pairs this coming Friday, then your best bet might be the upcoming U.S. retail sales report (Feb. 12, 1:30 pm GMT).

And it just so happens that I’ve got a Forex Trading Guide to help y’all get up to speed.

Why is this report important?

The United States Census Bureau releases a monthly report which presents the estimates for the total sales value at the retail level.

Forex traders care about this report because it provides us a preview of the overall health of consumer spending in the U.S. economy. And consumer spending, in turn, is important because it is a major component of U.S. GDP.

In fact, consumer spending or “personal consumption expenditure” has been keeping the U.S. economy afloat. If you look at the advanced Q4 2015 GDP report, for example, consumer spending had a positive contribution of 1.46% to total GDP growth, easily offsetting negative contributions from other components such as the -0.47% from net exports, thereby allowing the U.S. economy to eke out a GDP growth of 0.7%.

This report comes with two main figures: the headline reading and the core reading.

The main difference between the two is that the headline reading encompasses all the components while the core reading strips away sales from motor vehicles and parts dealers since sales from such stores tend to be very volatile.

As such, some forex traders tend to give more emphasis on the core reading since it is better for gauging the underlying trend.

What happened last time?

  • Headline reading m/m: -0.1% as expected vs. 0.4% previous
  • Core reading m/m: -0.1% vs. 0.2% expected, 0.3% previous

The headline retail sales reading for the December period printed a 0.1% contraction, which is within expectations. However, it was a disappointment for most forex trades (but especially Greenback bulls) since this is the first time in five months that retail sales contracted.

On a more upbeat note, the previous reading was upgraded from 0.2% to 0.4%, but this is overshadowed by the fact that the core reading came in worse-than-expected, printing a 0.1% decrease instead of a 0.2% increase. Not only that, the previous reading was downgraded from 0.4% to 0.3% as well.

Browsing through the details of the report, sales from motor vehicle and parts dealers were stagnant on a month-on-month basis, which helps to explain why the headline and core reading printed the same, well, reading.

As for the main drags, the 1.0% decline in sales from general merchandise stores such as department stores was the main culprit, followed by the 0.9% fall reported by clothing stores.

Sales from gasoline stations also posted a 1.1% decline, but it’s not clear as to whether the lower sales value was due to lower sales volume or lower oil prices.

What’s expected this time?

  • Headline reading m/m: 0.1% expected vs. -0.1% previous
  • Core reading m/m: 0.1% expected vs. -0.1% previous

For the upcoming retail sales report for the January period, economists and forex traders are expecting both the headline and core readings to climb back into positive territory by printing a 0.1% increase respectively.

Looking at some of the available leading indicators, total vehicle sales during January 2016 were slightly higher at 17.58 million when compared with December 2015’s 17.34 million.

This is apparently the fastest pace of vehicle sales since January 2000, which improves the probability that we’ll be seeing an upside surprise for the headline reading.

Moving on, ISM’s non-manufacturing PMI for January fell from 55.3 to 53.5, but the retail trade industry reported growth and more business activity during the period, with one respondent saying that “Sales have improved.

We are feeling more optimistic, but remain concerned about the impact of global unrest.” However, the report also noted retail trade was one of the industries affected by lower prices during the period, which will likely pull down the total retail sales value a bit.

Also, the NFP report for the January period was also mostly positive since the jobless rate was pushed to an 8-year low of 4.9% even though employment only saw a net increase of 151K. But what we’re really looking at is the faster-than-expected wage growth (+0.5% ) since that means more moolah with which to buy stuff.

Overall, the leading indicators are pointing to a stronger retail sales reading for the January period, with odds being skewed slightly towards an upside surprise.

How might the Greenback react?

As with most other economic reports, forex traders tend to buy up the Greenback as a knee-jerk reaction to a better-than-expected report.

But on the flipside, forex traders usually go on a quick Greenback selling spree if the readings disappoint.

And since the previous readings were a disappointment, especially the core reading, forex traders dumped the Greenback pretty much across the board.

USD Index 15-minute Forex Chart
USD Index 15-minute Forex Chart

After that, the Greenback’s forex price action began to diverge since it held steady against the other safe-havens (JPY and CHF) and the lower-yielding euro but began to steadily climb higher against the higher-yielding currencies, especially the comdolls (CAD, AUD, NZD).

This was most likely due to demand the safe-haven Greenback since oil and global equities were slumping hard at the time.