Release: UK Retail Sales m/m (Jan)
Consensus Forecast: -0.3%
Previous: 0.6%

UK Retail Sales Expected to Show Fragile State of UK Domestic Demand

Data this week showed UK inflation continuing to cool, as well the unemployment rate remaining at 8.4% and the claimant count rising more than expected. This followed last week’s announcement by the Bank of England of more quantitative easing. To end the week the UK will release its latest reading on retail sales with expectations that sales fell 0.3% in January following a 0.6% gain in December.

As you can see in the chart above retail sales have been moving in a one step forward, one step back fashion, showing that domestic demand remains choppy and uneven.

That has meant that domestic consumption has generally not added much to GDP and as we learned last month growth in the UK in the 4th quarter contracted.

The question now is whether growth can rebound in the first quarter of 2012, allowing the country to skirt a technical recession. If the consensus forecast is correct, retail sales will not be adding to consumption to begin the first quarter.

Worse than expected results here therefore should weigh on the pound especially, against higher-yielding currencies, though with its run-up against the dollar the GBP/USD pair may be subject to a drop-off as well.

Consumer Confidence Upbeat, But Will It Translate to More Spending?

Just yesterday, we did get a report that the Nationwide consumer confidence index rose to a five-month high, however much of the gain came on the back of the expectations index (which rose to 64 from 50),  as the present situation index continues to be depressed. The spending index also did not move much, increasing 1 point to 78.

Also if you look at the historical context of the Nationwide index we see that we still are mired in very low levels which does not argue for a major change in spending.

Still the data suggest that the underlying economic backdrop is not as weak as believed and therefore retail sales could surprise to the topside which would help the pound.

GBP/USD Bounces Up From Support, Will Macro Picture Intrude?

Looking at the GBP/USD pair in the daily timeframe, we see that the pair found support near 1.5650, which coincided with the 55-EMA as well as a 38.2% retracement of the upswing since mid-January.

While the price action today suggests that the counter trend move may be over, negative headlines from Greece as well as a dovish speech by Bernanke were the key catalysts here, events outside the macro situation in the UK.

If attention returns to the weak state of the UK economy from a poor retail sales report, then the pair may find resistance at the 200-EMA near 1.5825, and we can either see sideways consolidation, or another downward swing. However a better than expected release, with retail sales climbing for the month, could help the pair to breach its highs for the week, and if risk sentiment remains positive give the Pound a catalyst towards making a run at the 1.5929 highs from earlier in February.

To gain free access to live market intelligence briefings where we  discuss risk and trade management as well as the fundamental backdrop for key currency pairs, register here at IBTrade.

Nick Nasad is an analyst, educator, and trader; and one of the main contributors to  FXTimes – provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.