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Why is it important?

The U.S. retail sales report measures consumer spending by tracking the total sales of goods by all retail establishments. It’s a particularly big deal for the U.S. because consumer spending makes up about 70% of its economy and has been a key driver in its recovery.

What should we expect?

Most analysts think that headline retails sales in June will post a 0.2% uptick to undo the 0.2% decline in May. Meanwhile, core retail sales growth (which excludes automobiles) is expected to improve from -0.4% to 0.4%. But judging by recent reports, that may be easier said than done!

A study conducted by Thomson Reuters reveals that same-store sales rose just 0.1% last month, a far cry from the 0.5% surge that analysts had predicted. Retailers complained that consumers were really cautious about spending their hard-earned dough.

Continued weakness in the labor market (which saw its fourth straight month of worse-than-expected gains in June) and low consumer confidence are expected to have bogged down spending.

As Peter Cardillo, chief market economist at Rockwell Global Capital, put it, “No one will spend if it feels like we’re in a recession.” Darn right!

With all of this in mind, there’s a chance the U.S. retail sales report may end up just like the Thomson Reuters report – a big disappointment!

How do the markets usually react?

May 15, 2012 EUR/USD Chart

June 13, 2012 2012 EUR/USD Chart

As you can see above, the past two releases were followed by long, extended moves that lasted well into the New York session. Notice that while EUR/USD tends to follow through with the market’s initial reaction, it doesn’t always do so immediately, as we saw in last month’s release.

Also, you should note that dollar price action isn’t always positively correlated with the results. By that, I mean that positive results don’t always lead to a stronger dollar.

In times when the markets are trading based on risk sentiment (times such as these!), the dollar may rally at the sight of weaker-than-expected U.S. data. Alternatively, it may also weaken with better-than-expected results.

However, in trading the upcoming report, which is due on Monday, July 16, 2012 at 12:30 pm GMT, you also have to consider its implications on the Fed’s monetary policy. Will the results make the central bank more or less inclined to push through with QE3? Or will they just be ignored?

If the results are drastic enough to increase the need for QE3, it could lead to a dollar sell-off. On the other hand, if they’re so upbeat that they kill the prospect of more stimulus, the dollar may end up staging a solid rally.