Retail Sales Indicator – Impact On The Currency

Retail Sales Indicator Data Importance

Retail Sales Indicator have a major impact on currency price movements. Analysts consider retail sales data and related economic data releases for fundamental analysis.

Retail makes up a significant portion of the domestic GDP, and also reveals consumer sentiment. It reveals the extent of economic activity, and also the price pressures at play.

The state of the economy is one of the major influencers on the value of the currency. Consumer purchases and retail trends data reveal the economic health of the nation. Analysts study the economic data for the economies involved in the currency pair. This enables accurate near-term forecasts based on the economic strength of the two currencies.

How are Retail Sales Indicator Reported?

Every country compiles retail data differently.

The U.S. Census Bureau compiles the retail data in the U.S. and releases two major reports. Various private entities also compile such data, in many countries across the world.

The U.S. Census Bureau Retail Sales Index covers data relating to the retail sale of durable and non-durable goods. It includes food sales, restaurants and beverages sales, internet sales, and services related to the direct sale of goods. But it excludes financial goods and services.

The reports cover data of total retail sector spending in stores, and the changes over the previous month, in percentage. These reports, which portray the aggregate indicator, release MoM (month over month) and YoY (year over year).
The data in the monthly report have a lag of about two weeks. The forex markets react more to the MoM data, where deviations from expectations are more.

The U.S. core retail data excludes auto sales and gas sales from the retail sales growth data.
This report, released on a monthly basis, offers a clear gauge of consumer spending i8n finished consumer goods. Oil prices are volatile, and car sales have big sticker prices. As such, these inclusions can distort the basic indicator.

Another report, the retail sales control group data, excludes autos, gas, and construction materials from the retail data. Thus growth in automobile sales does not find a place in tracking retail growth or decline.

The data released by the U.S. Census Bureau through its reports cover retail growth or decline in over twelve thousand stores. The list of stores includes retail stores, retail stores, food and non-food stores, merchandise stores, appliance stores, clothing & clothing accessories stores, health & personal care stores, furniture stores, departmental stores, beverage stores, electronic stores, miscellaneous store retailers, and other stores, spread across the US.

The sampling is random, but based on the minimum size of the store, business area, number of employees and location, to avoid clusters. The sample changes once every five years.

Most economists and analysts follow U.S. Core Retail Sales as the data set is less volatile, and free from major distortions.

There is a consensus that the data is a reliable measure of economic activity. The representative sample makes extrapolation accurate. Analysts decipher the trend in the entire country accurately.

What do Forex Traders care about Retail Sales Indicator?

Traders and investors use various data in forex trading. Retail sales reports carry significant weight.

Retail sales growth, due to increase in consumer spending, indicate healthy consumer fundamentals.
Retail makes up about half of personal consumption, and about 70 percent of the GDP.
The retail figures show if the economy is expanding or contracting. A fall in sales means a contracting economy, and a growth in sales means a booming economy.

The percentage of increase or decrease reveals if the economy is expanding or contracting. Weak retail figures put downward pressure on prices, whereas strong retail trends have upward pressure on prices.

When there is pressure on prices, inflation also rises. To keep inflation in check, the Federal Reserve steps in and increases interest rates.
Increasing the interest rates encourages keeping more money in bank accounts. This tightens the money supply, and leads to a decrease in demand for goods. Lower demand makes goods cheaper, lowering inflation.

Inflation has a direct bearing on currency prices. When prices rise, the value of the currency drops. Each unit of currency can buy lesser goods and services, compared to before. Thus inflation leads to less purchasing power and loss of real value of the currency.

In 2021, the Federal Reserve, chaired by Jerome Powell, has raised expectations for inflation. They have brought forward the time frame to raise interest rates.

When rate hikes happen, it will increase interest rates throughout the U.S. economy, and make the dollar stronger. Higher yields in U.S. banks and instruments will attract investment from investors abroad. They will sell in their local currency, and purchase dollars. The increasing demand for dollars will make the currency stronger. The opposite happens when the Federal Reserve decreases the interest rates. In the past, increases and decreases in the interest rate have correlated well with upward or downward moves in the U.S. dollar exchange rate.

How Do Retail Transactions Affect the Economy?

Among all forms of sales, retail has the most direct impact on the economy. Market analysts track consumer spending, especially the sale of finished consumer goods and sales generation of flagship stores. Consumer spending levels shape market expectations.

Consumer spending habits evolve, shaped by various factors, such as festivals, holiday sales, the lifetime value of a product, the generational preferences, technological advances, and more. It also depends on the unemployment rate and the overall consumer confidence in the state of the economy. Short-term consumer spending behaviour, which influences the economy and forex prices, is often influenced by external conditions. For instance, retail spending witnessed a sharp decline during the start of the COVID-19 pandemic.

The health of consumer spending reveals the health of the economy. This, in turn, reveals the health of the currency. When trading in currency pairs, the currency pegged to the healthy economy will rise. Conversely, the currency pegged to the declining retail consumer prices will fall.

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