Retail Sales Effect on Forex

Would you like to know how retail sales affect the financial markets, especially forex? In what way can these reports benefit your trading? 

Forex market attention is constantly drawn to retail sales data releases at almost all major currencies. In fact, the Forex market is considered one of the world’s most dynamic financial markets. 

Dynamism is one of its main perks since any trader can take advantage of any change if he plays smart, but it’s also important to note that several factors can turn the tide. Retail sales reports are among those elements since they are important indicators of an economy’s growth.

Retail sales data is influential among the most important economic reports scheduled for release in the US and other countries like the UK and Eurozone. Commonly, the report affects most US Dollar pairs.

Let’s learn what it is, what it does, and how to use it to our advantage!

What is Retail Sales Data? 

The Retail Sales data is a tool that helps measure the economy’s overall health from the consumer’s perspective and is used alongside Consumer Spending data and Consumer Confidence data. It is a survey of randomly selected retailers, not an actual survey of all transactions in a given country. A representative sample from each group will be collected so that the necessary data can be sent up.

Although consumer data is a good source of marketing information for businesses, its weakness is that it does not always reflect the whole situation in the economy. Several goods and services are sometimes excluded from survey data of Retail Sales. 

For example, in the US, Automotive sales were not included in the survey. Additionally, Retail Sales reports ignore price fluctuation in the real economy and do not incorporate inflation.

However, Retail Sales data is a monthly report that summarizes a country’s retail sales over a certain period. Therefore, retail sales figures are displayed as percentage ups and downs. 

When consumption goes up because of national holidays or religious celebrations, the government usually adjusts the prices to make things more reasonable. So retail sales should be as high as possible. But if it falls periodically, it is a sign that policymakers must take action.

How are USD and retail sales related?

The US economy and the USD in the Forex market both greatly rely on retail sales, which constitute almost a quarter of economic activity in the US.

With higher retail sales numbers and rising interest rates, it isn’t surprising that the USD gains strength due to higher retail sales numbers. However, retail sales may also deteriorate if they get too hot, which would have the opposite effect and may depress the Dollar.

Because many US goods are manufactured overseas, increased demand for these goods also means that the currencies of countries that produce them are in demand. Therefore, a negative correlation between the US Dollar and these currencies can also be damaging.

Is Retail Sales Data Beneficial to Forex Traders?

Each month, the US Department of Commerce publishes a preliminary estimate of retail sales data. Therefore, the fundamental forex calendar will be impacted by this report, which covers Retail Sales for the previous month.

Market participants will likely see the report for each category. As a result, forex market trends might be influenced by their decisions about stocks and bonds. Forex traders, however, look at the overall percentage of the report rather than each facet.

With higher Retail Sales than expected, the economy is heading in the right direction. However, this might not be the case when a significant celebration comes up, such as Easter in the European Union or Christmas in the United States. Nevertheless, increases are usually expected during these times. Thus, Retail Sales data improvements should influence the markets only slightly.

Forex traders, however, would be better off checking all the different interpretations of a worsening Retail Sales report before thinking the economy is headed south.

Below are the two reasons why Retail Sales dropped since the economy deteriorated, and what they likely mean for the market:

An unlucky season 

Retail sales might be negatively affected by bad winter weather and other extremes. Besides, no one wants to go shopping in the blizzard, right? As a result, other data releases tend to point to similar bad numbers during such months, so traders should be careful when putting money on this currency. On the other hand, economic indicators typically recover once the season has ended. 

Hikes in taxes 

Retail Sales may drop after tax increases, but that is fine. It is the way things are. However, when the number is lower than expected, the tax increase has a more significant impact than analysts think. For that time, analysts’ estimates may miss the mark. However, they will revise their estimates so the next one may be accurate. Accordingly, the currency may drop temporarily in the FX market, but it will not persist. 

Advantages of retail sales report 

• A retail sales report is considered a timely report as it is released shortly after the month they conduct the survey. 
• To gain a deeper understanding of the data, traders often obtain a complete breakdown of component sectors.
• Economic analysts and economists identify underlying demand patterns by excluding volatile data to increase a report’s relevance and usability.

Retail Sales Report’s shortcomings

• There is seasonality in retail sales as 20% of it takes place in December. 
• Advance report statistics can misrepresent an economy’s performance due to incomplete data.
• The retail sales report does not fully represent the US economy because retail services are so important. This is even more surprising when you realize that the retail service industry includes movies, haircuts, plumbing, and transportation, covering 2/3rd of a person’s expenses. 

Retail Sales and Forex – the Bottom line

Hence, the value of a currency increases when retail sales increase—the value of a currency increases when housing sales increase. Conversely, if a trade balance is negative, the currency’s value may decrease. The above mentioned are the few ways a forex trader might look at the retail sale report. 

Do you think you will be able to get profit from this? Be cautious. Get the previous month’s record first. You can use fundamental calendars for that. For example, if you trade a currency pair, consider the gap between the data in the previous and current periods.

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