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Economic Indicators: Breaking Down the Retail Sales Index (RSI) Report

   

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Each month, investors and economic analysts cast an eye over a number of key reports. Since 1951, the Retail Sales Index (RSI) report has solidified its status as one of the most important of these, largely due to its overview of the value of merchandise sold within the retail trade sector. Calculated by reviewing a selection of companies engaged in the business of selling end products to consumers, the report has always been a true testament to how companies of all sizes—from Walmart down to small-town stores—are collectively impacting the U.S. economy.

To help you understand its consistent relevance, the following breaks down the RSI report, explaining why it’s important and how you should approach it from a forex trading perspective.

Importance of the RSI Report to Forex Traders

Data is what drives the forex market in any direction, so you would be right to think that the RSI report has the power to be particularly impactful. The information derived from the RSI report is used by multiple government agencies, small and large businesses, investors, academic researchers and analysts, and active forex traders. It’s safe to say that the impact of the RSI report is far-reaching, largely because it is a key element in determining gross domestic product (GDP), a pivotal economic indicator.

The data that emerges from the RSI report is of particular interest to the Federal Reserve. It uses the data as a means to analyze and determine consumer purchases, which factors into the Fed’s overall economy analysis and understanding of emerging trends.

As you may expect, any information related to the RSI report receives widespread financial media coverage. Forex traders often gain insight from this data, as it can highlight trends in consumer spending via the overall analysis of economic and business trends along with the industries impacted more directly by the data.

 

Pros and Cons of Reading the RSI Report

When traders seek out the RSI report, it’s usually because they’re hoping to get a jump on forex trades that leverage anticipated trends—or newly emerging trends—in the retail sector. The initial number released for the RSI can offer a snapshot view of the strength of the U.S. economy, which can help traders predict how the value of the U.S. dollar might change in relation to other currencies.

The biggest advantage of this report is that it can offer an early glimpse into how the U.S. economy is performing—especially in comparison to other market indicators traders may use. But the early insight afforded by the RSI is also its greatest disadvantage: Since the first number released in the RSI report can be subject to revision, it’s only a preliminary figure and may end up changing after you’ve made trades based on this indicator.

Additionally, the RSI report usually comes after Wall Street analysts have already made their predictions of how U.S. retail performance will fare according to the report. In most cases, those Wall Street predictions are close, meaning the RSI report’s insights won’t necessarily provide new, shocking information.

In cases where the RSI report diverges from Wall Street expectations, the forex market could see a lot of volatility resulting from the uncertainty of this development. While this volatility can be a boon for traders hoping to take advantage of big price swings, it could also lead to steep losses if your portfolio is affected by this volatility.

How to Best Use the RSI Report

The RSI report isn’t perfect, but it does present some interesting data that forex traders can use to alter and improve trading output. The release of the RSI report has the power to create market volatility, altering the performance of the USD in the process. Any form of volatility is going to impact your trading, largely because it is a predictor and precursor to inflationary pressure. This essentially can cause investors to rethink the chance of Fed rate hikes or cuts, depending on the leaning of the underlying trend. The RSI report gives any trader plenty to think about when it comes to the current and future direction of the economy based on consumer confidence.

Should the RSI report reveal that retail sales growth is slowing—or possibly even stalling—it means that consumers are not spending at the same level as before. A stagnating RSI report can signify that a potential recession is on the horizon, as a lack of consumer consumption shows that the financial pinch is being felt among the general public, impacting the economy in the process.

In October and November 2020, the RSI reports issued by the U.S. Census Bureau indicated modest declines in retail sales, serving as supportive evidence of a stagnating economy. While there are many complicating factors involved in evaluating the U.S. economy during the pandemic, the disappointing RSI report information was followed by a sharp decline in USD/JPY.

This sharp decline is notable since the economies of the United States and Japan operate with much greater independence from each other than, say, the U.S. and Canadian economies do. While RSI is likely not the sole cause for this drop, the stagnation—and its foreshadowing of greater economic struggles brought on by pandemic-related restrictions on economic activity—resulted in a dramatic price decline from which the currency pair has yet to recover.

As the effects of the pandemic carry into 2021, RSI will remain an important report used to evaluate economic health and recovery. But given the somewhat stable retail trends among consumers—and increased adoption of online shopping—it’s likely that traders will want to consider other markers of economic data, including jobs reports, to gain a more comprehensive view of economic conditions beyond the scope of retail.

It is important to keep an eye out for the consensus number (or “street number”) because how close or not this number is to the predicted figure will be revealing. The forex market will be rocked by uncertainty should it fall short, so if the figure is lower than expected, it could potentially shake the USD. It’s effectively an indicator of economic performance, so preparation is key to effective trading off the back of the RSI report issue. No matter whether the USD is ultimately pushed forward or dragged down, it pays to increase the level of stop-loss and risk management measures in effect prior to any RSI report.

What You Can Take Away from the RSI Report

Looking at a recent RSI report, traders will find that US retail sales have suffered an unexpected fall since the turn of the year. After showing zero growth in December 2017, performance was below market expectation in January 2017, representing the largest drop since February 2016. The dip is being attributed to a number of factors, including a fall in auto sales, which certainly shouldn’t be overlooked. Also contributing to the dip are building material, food service, and general retail sales. Overall, five out of the 13 major retail categories had seen falls in the latest RSI findings.

Drops in the RSI report have been forecasted over the past 12 months, and as a forex trader, this news is cause for concern. Any retail sales drop is questionable, but this, the biggest U.S. retail sales drop in a year, isn’t just any drop. If you are an active forex trader, you can expect this report to weigh down the USD. This is obviously just one example of what you could take away from any RSI report, but even in less extreme cases, when this data is released, it will certainly give you food for thought.

Conclusion

When undertaking intensive technical analysis, forex traders must consider the various kinds of reports and indicators, each with different functions, goals, and uses in trading. Detailing both consumer spending levels and consumer spending habits, the data from the RSI report often proves to be far-reaching, carrying forex market implications in the process. Due to its importance, especially with regards to GDP, as a forex trader, you shouldn’t let the RSI pass you by without due thought and consideration.

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Disclaimer:

The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.

This post was written by Graeme Watkins

CEO Valutrades Limited, Graeme Watkins is an FX and CFD market veteran with more than 10 years experience. Key roles include management, senior systems and controls, sales, project management and operations. Graeme has help significant roles for both brokerages and technology platforms.

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