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Hi there, forex friends! If you’re lookin’ for some post-NFP Greenback action, then you better read up since the U.S. will be releasing its retail sales report for the July period this Friday (August 12, 12:30 pm GMT).

What is this report all about?

The U.S. Census Bureau releases a monthly report showing the total estimated value of sales at the retail level. This report is important to forex traders and decision-makers alike because it allows us to get a glimpse of the overall level of consumer spending or “personal consumption expenditure” in the U.S. economy.

And for the newbies out there, consumer spending is very important because it is the backbone of the U.S. economy. In my review of the Advanced Q2 U.S. GDP Report, for instance, I noted that the 4.2% jump in consumer spending (+1.6% previous) was the main driver for the U.S. economy since it added 2.83% to total GDP growth (+1.11% previous), easily offsetting economic drags from other GDP components.

And as stated in the July FOMC statement, the Fed expects robust household spending levels to help sustain the moderate pace in U.S. economic growth.

To add to that, this Friday’s retail sales report is for the July period, which is the first month of the third quarter. So if this retail sales report disappoints, then that would mean a bad start for Q3. And that, in turn, will likely give the Fed an excuse to delay further rate hikes even more.

Oh, also note that there are two readings: (1) the headline reading and (2) the core reading. The headline reading includes all retail store types while the core reading excludes sales from motor vehicles and parts dealers since sales from such stores tend to be very volatile.

Having said that, some forex traders tend to give more emphasis on the core reading since it is a better gauge for the underlying trend in consumer spending.

What happened last time?

  • Headline reading m/m: 0.6% vs. 0.1% expected, 0.2% previous
  • Core reading m/m: 0.7% vs. 0.4% expected, 0.4% previous

The headline retail sales reading for the June period showed a 0.6% month-on-month expansion. This was a pleasant surprise because it was expected to only barely increase by 0.1%. But on a slightly more downbeat note, the headline reading for May was downgraded from +0.5% to just +0.2%. The core reading, meanwhile, increased by 0.7%, which is great since it was expected to maintain May’s +0.4% pace.

Looking at the details of the report, the expansion in retail sales was pretty broad-based, with 11 out of 13 retail store types reporting increases in sales.

The only store types that reported lower retail sales were clothing stores (-1.0% vs. -0.9% previous) and food services and drinking places (-0.3% vs. +4.9% previous). I guess the decrease for the latter means that Americans are not eating out nor drowning their sorrows in the local pub as much.

Overall, the retail sales report was awesome. It’s even more awesome when you consider that the readings were expected to deteriorate. As such, forex traders reacted by buying up the Greenback, as you can see below.

USD Index: 15-Minute Forex Chart
USD Index: 15-Minute Forex Chart

What is expected this time?

  • Headline reading m/m: 0.4% expected vs. 0.6% previous
  • Core reading m/m: 0.2% expected vs. 0.7% previous

For this Friday’s July retail sales report, the consensus among economists is that both the headline and core readings are expected to increase at a slower pace. The headline reading is only expected to print a 0.4% increase while the core reading is expected to come in at a much slower 0.2% increase.

Looking at some of the available leading indicators, total vehicle sales in July jumped by 6.81% to 17.88 million (16.74 million previous), which is the best reading since November 2015. This means that there’s a higher probability that we’ll be seeing an upside surprise, at least for the headline reading.

Next, ISM’s non-manufacturing PMI for July crept down from an eight-month high of 56.5 to 55.5, which is a real bummer. But on the bright side, commentary from the PMI report noted that retail trade was one of the 15 industries that reported another round of growth in business activity.

The retail trade industry was also one of the 13 industries that reported an increase in new orders. Also, retail trade was one of the 12 industries that reported an increase in employment. These increases in business activity, new orders, and payrolls all point to strong levels of retail demand in July.

Speaking of payrolls, the July NFP report revealed that there was a faster-than-expected increase in wages. And this hopefully translated to higher consumption levels. Moreover, the NFP report confirms the PMI report since the retail trade sector did add to jobs, albeit less than last time (+14.7K vs. +25.7K previous).

Moving on, imports of consumer goods increased by 3.89% from $47.94 billion to $49.81 billion in June, which could be a sign of higher consumer demand.

Overall, the leading indicators appear to be pointing to stronger retail sales reading for the July period, so odds seem to be skewed towards an upside surprise.

How might the Greenback react?

As with most other economic reports, keep the following tips in mind:

  • Stronger-than-expected figures tend to boost the Greenback while weak figures usually trigger a quick selloff. And as you saw earlier, the previous retail sales report was an example of the former since the Greenback shot higher due to the upside surprise.
  • If Greenback pairs trade sideways just before the report is released, then the reaction to the report tends to be more explosive. And the chart from earlier is another textbook example of this.
  • There’s no shame in sitting on the sidelines if you’re not comfortable with this increased volatility among dollar pairs.

Having said that, there’s a good chance that Friday’s retail sales report could inspire more follow-through buying (or selling).

Last time around, the June NFP report showed a solid increase in non-farm payrolls but wage growth was more subdued than expected. Forex traders therefore steadily erased the Greenback’s gains from the NFP report. But the retail sales report came in better-than-expected, thereby halting the Greenback’s slide (and then some).

USD Index: 1-Hour Forex Chart
USD Index: 1-Hour Forex Chart

And if y’all can still recall, I ended my Quick Review of the July NFP Report by writing that: “I guess we’ll know what the market finally thinks about the NFP report in next week’s price action for the U.S. dollar.”

And based on the charts below, it looks like the sense of euphoria from last week’s blowout NFP report seems to have disappeared for now since the Greenback has retreated from all its forex rivals. Heck, most pairs are about to reach their pre-NFP levels (or worse).

USD Pairs: 1-Hour Forex Charts
USD Pairs: 1-Hour Forex Charts (Click to enlarge)

A solid retail sales report would therefore likely reinforce the NFP reading. And this will likely attract more Greenback bulls. But on the flip side, a disappointment would likely scare the Greenback bulls away and entice even more bears to come out and play.