Retail sales in the U.S. jumped 1.1% which was the biggest gain in five months and forex traders went haywire over the economic release. Every currency pair where the USD is the base as well as quote currency moved rather drastically right after the announcement. Unfortunately, it corrupted plenty of retail accounts as stop loss orders were triggered which caused trader’s to lose money especially on the EURUSD pair.
What was the reason for the severe drop in currency pairs where the USD acts as the quote currency?
The economic report was better than expected; although for all the wrong reasons
Core retail sales, which exclude the volatile food and energy components, rose 0.4%
Market participants hope this will translate into stronger than expected GDP data for Q1
Mr. Obama’s tax increase on the middle class has not impacted consumers as of yet
Was the retail sales report really that good?
No, it was not. The majority of gains come due to a surge in gasoline sales which means Americans had to pay more at the pump which takes away from their discretionary budget and therefore they will not be able to spend as much in other areas of the economy. Increases in gasoline sales do not translate to economic growth and gives no incentives for job growth.
In order for the economy to grow core consumer spending needs to increase which would eventually lead to more economic activity and therefore job growth and an expansion in the economy. Mr. Obama imposed a tax hike on the middle class which will take away between $1,000 and $4,500 per year in discretionary income from American households. Obama’s 2% tax hike is often overlooked by forex traders as they prepare their currency strategy, but it will take away from GDP growth and therefore the USD will feel the negative impact of it.
This report, if anything, paints a rather dark economic picture for the US as consumers pay more for energy and therefore will be able to spend less on core economic activity. Consumer spending accounts for over 70% of all economic activity and forex traders should expect US GDP growth to contract for 2013.
How can you avoid the negative impact of economic data corruption in your forex trades?
Be aware of when an economic release will be announced
Adjust your stop loss level and decrease the pips you are willing for your forex pair to move against you
Keep in mind that initial moves are often reversed and the natural trend may continue
Set a new entry level for the same currency pair at after the pair moved