Forex Trading Library

US Consumers to Keep Propping Up the Dollar?

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The University of Michigan will issue its monthly consumer sentiment report later today. It will be the latest insight into the surprisingly resilient US shopper. Even as people complain that they are facing pressure from rising prices, the US economy continues to be supported by consumer demand. In turn that continues to provide inflationary pressures.

On Wednesday, US retail sales grew faster than expected. In response, yields on US treasuries rose as investors priced in the possibility that inflation would remain above target for longer. Despite the fluctuation in yields, markets still price in six rate cuts this year, against the three forecast by the Fed. And lately Fed officials have been trying to imply that cuts could be fewer than that.

Drama overload?

It should be noted that as this is going on, Congress is pushing forward on another continuing resolution to keep the government open. If no budget is met, the government could face a partial shutdown starting on Friday. Funding would completely run out by Feb 2, if no bill is passed. But the markets appear to be remarkably sanguine about it, as the fractious House of Representatives will vote on stop-gap funding today. That leaves precious little time to deal with any potential disruption of the bill making it to President Biden for signing on the weekend.

It could be that markets are just used to the political posturing on Capitol Hill which leads to an 11th hour deal. Especially in the middle of an election year, when politicians will not want to fall afoul of voters. A partial shutdown would likely have minimal impact on the economy in the short term. On the other hand, that means if something were to happen over the weekend so there wasn’t a deal by Monday, the markets could be very surprised.

Focusing on the Data

The University of Michigan is expected to report that US consumers saw a slight weakening to 69.0 from 69.7 prior, but will remain substantially strong and far from falling into contraction. What could have a larger impact on the markets is if there is a substantial change in the inflation expectations. At the moment, the forecast is for US consumers to affirm their expectations that inflation will be unchanged at 3.1%.

Some economists have posited that the strong consumer sentiment in the US is due to the effects of inflation more than optimism among shoppers. That is, Americans believe that prices will keep rising, and are therefore buying non-perishables now instead of later when prices will be higher. This could give rise to increased demand. But also implies that if consumers believe that inflation has come under control, they could slow buying substantially.

The Future of the Dollar

Assuming that there is smooth sailing over the weekend, next week poses an increased amount of risk events. Not just from several central bank rate decisions ahead of the Fed’s meeting at the end of the month. Earnings season is set to ramp up in earnest.

So far, corporate reports have provided mixed results. But many have reported concerning outlooks, including recruiting firms which have forecast slowing hiring. Worse than expected earnings over the coming week could bring back the specter of a recession, and erase the recent gains in the dollar. Better than anticipated earnings, on the other hand, could lead to an unusual situation where the stock market and dollar rise in tandem, as investors accept that the Fed might not have the opportunity to cut as much as hoped.

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