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If you still haven’t decided how you’re gonna play the U.S. retail sales release (due tomorrow at 12:30 pm GMT), here’s my two cents on the upcoming report.

Word on Wall Street is that U.S. consumer spending most probably picked up last month. The headline retail sales figure is expected to print a 0.6% increase, while the core version is projected to post another 0.7% uptick for March.

Wait a minute, isn’t consumer spending supposed to slump because prices of goods are rising? I mean, I’d be more tight-fisted and less willing to spend if my necessities (just milk and cookies, really) are getting more expensive. Heck, even Big Pippin is cutting back on his expenses that he no longer splurges on bling-bling each week!

By the looks of it, analysts are predicting that the significant improvements in the labor market had a larger impact on spending than rising inflation during the month. After all, didn’t the U.S. boast of a 216,000 increase in hiring for March? Joblessness is now down from 8.9% to 8.8%, which implies that a slightly larger share of the American population is getting paychecks. That means more people have cash to burn!

Aside from that, the four-week average of jobless claims, which is considered a better measure of hiring trends, fell by 5,750 to 389,500. Now that’s a notable improvement, I must say! Although it’s still too early to call this a rebound, the stabilizing labor market most likely contributed to better economic prospects for Uncle Sam. And if things are looking rosier, consumers are no longer uneasy about whipping out their wallets and swiping those credit cards.

Another consumer spending report hints that Americans shopped ’til they dropped in March. Last week, the same-store sales report, which compares transactions of retailers that are at least 12 months old, showed that consumer spending was up by 1.7% in March. This wowed a few market junkies who were bracing for a 0.7% decline. From what I’ve heard, analysts were expecting the report to reflect delayed spending because Easter Sunday comes in three weeks later than it did last year. But I guess that wasn’t enough to stop those shopaholics!

Now let’s get to the juicy part. What does this mean for the dollar?

Looking at EUR/USD in the past two releases, it seems like the pair’s reaction to the report is primarily dictated by market sentiment.

EUR/USD 15-minute chart

The dollar rallied by 45 pips when the U.S. retail sales report for January came in at 0.3% and fell short of the market’s 0.5% forecast. When I asked Pip Diddy what the possible fundamental reason was for the move. He said that maybe the dollar’s safe haven reputation might have been highlighted by the worse-than-expected GDP reports from France and Germany that were released earlier on in the day.

EUR/USD 15-minute chart

Meanwhile, EUR/USD rallied when the U.S. consumer spending figures for February topped expectations. Note that the data was released on March 11, the same day when the earthquake hit Japan. Perhaps repatriation flows might have weighed on the dollar.

So what do you think will be the effect of tomorrow’s release on EUR/USD? Whatever it is, make sure you get a good feel of market sentiment before you bet your pips!