US Dollar Holds Firm as Consumer Sentiment Hits 46.3

The US dollar held its ground after a fresh reading of American household confidence came in weaker than economists expected. According to Marketpulse, the University of Michigan’s preliminary consumer sentiment index fell to 46.3 points in early October, its lowest level since May and below the 47.6 consensus.

The same survey showed consumers now expect prices to climb 4.7% over the next twelve months, against 4.6% in September. That combination — softer confidence and firmer inflation expectations — has kept the dollar bid while investors reconsider how much further the Federal Reserve may tighten.

Also read: Stocks Close Lower as Weak Retail Sales, Consumer Sentiment Fuel Economic Worries

Key facts

• The Michigan consumer sentiment index fell to 46.3 from an expected 47.6, with the current conditions component sliding from 50.9 to a record-low 44.7.
• Twelve-month inflation expectations rose to 4.7% from 4.6% in September; five-to-ten-year expectations stood at 3.5% a year.
• CME FedWatch data put the probability of a hike at the October meeting near 19% and at roughly 71% for December, following a 25-basis-point increase in September.
• EURUSD traded near 1.1190 as elevated Treasury yields and Middle East geopolitical tensions supported the dollar.

Household stress meets sticky prices

The decline in sentiment was driven by higher living costs, expensive fuel and borrowing, and signs of a softer labor market, with lower-income households under the most pressure. Their assessment of buying conditions for durable goods dropped to an all-time low, a sign of eroding purchasing power.

Spending itself has not collapsed. Consumer outlays remain supported by the labor market and past gains in financial assets, and weak sentiment has so far not translated into an equally sharp drop in actual purchases. Still, the gap between what households say and what they do is now the variable traders are watching.

Also read: US adds just 29,000 jobs in September as unemployment hits 4.2%

Fed expectations drive the dollar

After September’s quarter-point hike, the market’s read on the Fed has shifted. October looks likely to pass without a move, but December does not: the bias in pricing suggests investors see an October pause as temporary rather than the end of the tightening cycle. The minutes of the September meeting noted that most officials saw the possibility that more increases may be needed before the end of the year.

Higher expected rates tend to lift Treasury yields, which in turn make dollar-denominated assets more attractive and limit the currency’s downside, particularly against currencies whose central banks are expected to stay less restrictive. Safe-haven demand tied to Middle East tensions adds a second source of support.

Why it matters

For currency and rates traders, the story has flipped from how fast the Fed will cut to how long it will hold or tighten. That keeps the dollar supported in the near term but raises the stakes for any data showing a real crack in consumption, since spending is the main engine of US growth. A genuine slowdown would force markets to reconsider the December hike odds that currently underpin the currency’s strength.

This is not financial advice, and currency markets are volatile and uncertain.

What to watch

The next CPI and PCE inflation releases, labor market data and consumer spending figures will determine whether the US economy can keep growing under high borrowing costs. Retail sales and personal consumption data will show whether stated intentions to cut back are showing up in actual spending.

Written by

Benjamin

Benjamin Carter covers business, finance, and the stock market for StockPil, focusing on the trends and data that matter to everyday investors.

Source: MarketPulse