What is Retail Sales? Understanding Its Impact on Forex Markets

One of the most important macroeconomic indicators in Forex is Retail Sales. It is marked as highly significant and can cause major fluctuations in the market whenever the news is released. But what is Retail Sales? Why is it important? How does Retail Sales data affect the market? All will be revealed in the content of the article below.

What is Retail Sales – How to Analyze?

What is Retail Sales?

Retail Sales, meaning retail turnover, is an indicator measuring the total amount of money consumers in a country spend on goods, or can be seen as the total sales of goods in the retail sector. This data is usually released by the U.S. Census Bureau bi-monthly.

Based on Retail Sales data, one can see:

• The overall health of the economy
• Consumer demand for finished products
• Whether the economy is expanding or contracting
• Whether the unemployment rate will rise or fall in the future
• Trends in company sales/profits
• The level of activity in the manufacturing sector

=> It can be seen that Retail Sales – Retail Sales is an extremely important data, and above all, it is an important factor in determining the Gross Domestic Product (GDP)

If you closely follow the economic calendar, you will see that there are different types of Retail Sales, with varying levels of importance, such as:

• Retail Sales (MoM): Monthly retail sales data.
• Retail Sale (YoY): Annual retail sales data.
• Core Retail Sales: Retail sales data adjusted for inflation.

Additionally, not only the U.S. releases Retail Sales data, but many other countries also publish this data monthly/annually. In terms of importance, it may not be as critical as the U.S., but it can still somewhat affect the economy and currency of the country under consideration.

For example, the UK’s Retail Sales MoM, marked as moderately important:

Where to Look Up Retail Sales Index?

• You can find U.S. Retail Sales statistics at: https://www.census.gov/retail/
• Both pre-estimates and Retail Sale data are available in aggregated format on the St. Louis FRED website: HERE
• Look up Retail Sales of various countries: https://tradingeconomics.com/country-list/retail-sales-mom

The Importance of Retail Sales in Analysis

Retail Sales data is important for many because consumer spending accounts for 66% of the United States’ Gross Domestic Product (GDP). The rest comes from Government Spending, Business Spending, and Net Exports. Therefore, Retail Sales is a key indicator of the health of the economy.

It is also necessary because it represents the final data in the supply chain. All the statistical data before the Retail Sales figures, such as changes in inventory, production output… all lead to a final figure: retail sales. Therefore, Retail Sale is the data that confirms and triggers the next trend, affecting other indices, and creating a cycle.

Retail Sales provide analysts with a sense of the country’s economic situation over a certain period.

• When the economy grows, creating jobs, increasing wages, and people are optimistic and confident, they will spend more and shop more => Retail Sales increase.

• When the economy slows down and starts to decline, people see their income shrinking, unemployment rises, they will limit buying unnecessary items like TVs, washing machines, designer goods… => Retail Sales decrease.

Then, looking at Retail Sales data, one can also predict somewhat the upcoming economic trend:

• When Retail Sales increase: Businesses will see their revenue increase and the demand for their products also rises. This will encourage businesses to invest in operations, increase employment, and even raise wages. This will stimulate the economy to grow (To a certain extent) – But will also have to face rising inflation.
• When Retail Sales decrease: People will become more worried, save more, and spend less. Businesses seeing a decline in sales also reduce output and manpower, increasing unemployment. Gradually, this will cause the economy to fall into deflation, possibly leading to a recession.

Regarding the stock market:

A positive Retail Sales index will create an optimistic sentiment for both manufacturing companies and investors. A good index usually brings higher profits for the company, exciting shareholders and investors to buy more shares, helping to push the company’s stock price higher. Conversely, if Retail Sales decrease, stock market investors will actively sell shares and buy safer assets like government bonds, gold… This causes the stock price to plummet sharply, while the price of gold and government bonds are sought after and surge.

It should be noted: Retail Sales data is seasonal, as it tends to increase during the holiday season due to high shopping demand. Also, some Retail Sales data may be seasonally adjusted, but it may not be adjusted for inflation. Therefore, when analyzing Retail Sales, you also need to pay attention to this information for the most accurate view of a country’s economy.

The Impact of Retail Sales on the Forex Market

Forex market traders often hope that Retail Sales will make significant changes each time they are announced, so they can use this change to predict and trade according to the trend they anticipate. The monthly Retail Sales data from the United States is marked as the highest importance, as shown in the image below:

Retail sales is a fairly reliable indicator to predict the upcoming economic trend, an important indicator for early inflation or deflation forecasts. In the US, this index is closely watched by forex investors every month, as it is one of the factors for the Fed to make decisions on future interest rate increases or decreases.

Specifically:

• When the economy is overheated, there is too much money among the public, people are willing to spend and shop, the Retail Sales index rises high, the prices of all goods skyrocket, creating inflation risk for the economy. Then, the FED will take measures to increase interest rates to curb inflation. => When the Fed raises interest rates, the value of the USD will increase.

• When the economy enters a recession, Retail Sales decrease, the FED will have to apply measures to stimulate the economy to grow again (including lowering interest rates) => When the Fed lowers interest rates, the value of the USD will decrease.

But importantly, when analyzing Retail Sales in Forex, it’s not just about seeing if it increases or decreases compared to the previous period, but comparing actual data with forecast data. Typically:

• Actual Retail Sales data > Forecast data ⇒ The value of the currency increases.
• Actual Retail Sales data < Forecast data ⇒ The value of the currency decreases.

So how does Retail Sales data affect the currency? Let’s take a look at the following example. The image below shows that the US Retail Sales data has fallen sharply compared to the previous month, indicating that the economy is experiencing a major disruption.

Let’s see how the market reacts to this data:

We will start with the USD/JPY currency pair to witness the impact of Retail Sales news. The image above shows the state of the chart before the news announcement, with the general market trend being upward, and currently, the price is on track to continue the trend.

After the news announcement, the price experienced a sharp increase, and volatility was also strong. Although the Retail Sales data was very poor, the actual data was higher than forecast, leading to a large green candle (price increase) in the market. This shows that the market is “very sensitive” to Retail Sales news.

Or take the same US Retail Sales data as above, but let’s see the fluctuations with the EUR/USD pair (before News):

Looking at the image above, we can see that the USD is very strong, so EUR/USD is in a downtrend. After the News is released, the data is greater than forecast, we may see a red candle, indicating that the USD is still quite strong.

=> Overall, the two examples above show that the market is very sensitive to Retail Sales news. If you are a trader who likes scalping, rely on the actual Retail Sales data and forecast, to strategize trading with Retail Sales – News.

But what about when trading for the longer term, is Retail Sales news effective?

If you follow long-term trends, it’s important to know the state of the economy you are monitoring. Retail Sales is a factor that helps predict and forewarn inflationary pressure. This can basically cause investors to rethink opportunities for Fed interest rate increases or decreases, but it depends on current inflation and interest rate trends.

If the Retail Sales report reveals that retail sales growth is slowing down – or even possibly decreasing – it means consumers are no longer spending as before. A stagnant RSI report could indicate that a potential recession is approaching. Regardless of what the Fed does with interest rates, in the short term – signs of an economic downturn will negatively impact the currency’s value in the long run.

Example: In October/November 2020, the RS-Index report by the US Census Bureau showed a decline in retail sales, serving as evidence of a stagnant economy. Despite many complex factors involved in assessing the US economy during the pandemic, disappointing RS-Index news led to a sharp decline in the USD/JPY exchange rate.

You might be interested in: Forex Economic Calendar: Why Every Trader Needs & How to Analyze?

Above are the details about Retail Sales – What is Retail Sales. Hopefully, through this article, you have understood somewhat about Retail Sales, as well as how to analyze Retail Sales effectively, and utilize this data to trade in the Forex market. I wish you success.