The British pound has come to a cross roads. Technically, the currency has sold off sharply over the past few months, leading the unit to touch a 10-month low against its US counterpart and potentially shifting sentiment to an oversold reading around 1.9500. On the other hand, the economic picture continues to deteriorate and the markets are increasingly speculating on another BoE rate cut in February. Though, after the January meeting, when the MPC voted to keep the overnight lending rate unchanged at 5.50 percent to monitor the effects of its previous easing, the timing for the next quarter point cut was given more leeway. The next move by the central bank will most likely be determined by growth trends as consumer-level inflation is right around target.
Trading the News: UK Retail Sales
What’s Expected
Time of release: 01/18/2008 09:30 GMT, 04:30 EST
Primary Pair Impact : GBPUSD
Expected: 0.2%
Previous: 0.4%
How To Trade This Event Risk
The British pound has come to a cross roads. Technically, the currency has sold off sharply over the past few months, leading the unit to touch a 10-month low against its US counterpart and potentially shifting sentiment to an oversold reading around 1.9500. On the other hand, the economic picture continues to deteriorate and the markets are increasingly speculating on another BoE rate cut in February. Though, after the January meeting, when the MPC voted to keep the overnight lending rate unchanged at 5.50 percent to monitor the effects of its previous easing, the timing for the next quarter point cut was given more leeway. The next move by the central bank will most likely be determined by growth trends as consumer-level inflation is right around target. A number of the economy’s major sectors already threaten to cool growth, so the burden to secure expansion and stave off further monetary easing has been transferred onto the shoulders of the consumer. Domestic spending makes up the bulk of the economy, so a slip there could quickly wind GDP. Looking at the most recent round of consumer-related data, there is evidence to suggest spending trends held steady and that it has slowed. For bulls, unemployment has dropped to the lowest level since 1975 and wage growth continues. On the other hand, the costs of living and lending have risen and consumer confidence has dropped to its lowest level in 12 years – while plans to make major purchases is at 16 year lows.
Considering the mounting speculation that economic growth if flagging and the next MPC rate cut is just around the corner, a strong retail sales read could generate the necessary event-driven momentum needed to finally pull GBPUSD out of its declines. The surprise factor would be even greater after the BRC’s version of the sales report marked its weakest increase in consumption trends since March of 2006 and the worst holiday shopping season since 2004. Looking back over the previous three sales releases, it is clear that this indicator is a notable market mover with even modest divergences from expectations. Nevertheless, we will look for an upside surprise of at least 0.3 percentage points as a fundamental signal for a long position. With the right fundamental back drop, we will look for a green, five minute candle to confirm entry on a long of two lots GBPUSD. The initial stop will be set at the swing low (or reasonable distance) and the first target will be set equal to this risk. The second target will be based on discretion. To preserve our profit, we will move the stop on the second lot to break even when the first lot hits its target.
With speculation for a considerable cooling in growth trends and a forthcoming BoE rate cut, a drop in consumer spending may finally remove support from the pound. We will look for a negative sales number and follow the same strategy as above, just in reverse.
