Forex Markets Closes the Week in Consolidation

Last week the price action was slow in forex, with major pairs trading in a tight range, with nothing major to drive them. Traders were also waiting for the US CPI (consumer price index) inflation figures which will be released next week, so most forex traders took the sidelines this week.

On Friday though we had an interesting development, as the preliminary data from the University of Michigan on consumer sentiment revealed a significant decrease in the sentiment index, which had a notable impact on the US session. The index fell to 67.4 points from 76.0 points previously, indicating a sharp decline in consumer confidence.

Both expectations for future economic conditions and assessments of current conditions saw substantial decreases, with expectations dropping to 66.5points  from 75.0 points and current conditions declining to 68.8 points from 79.0 points. In addition, inflation forecasts increased, with respondents anticipating higher prices in the coming months.

One-year inflation expectations rose to 3.5% from 3.2% last month, reaching their highest level since November 2023. Similarly, the five-year inflation rate increased to 3.1% from 3.0% last month. The remark regarding respondents being more negative about inflation when asked online raises an interesting question about their overall sentiment towards the economy.

It’s plausible that if respondents are expressing greater concerns about inflation, they may also harbor pessimism about the broader economic outlook. However, further analysis would be needed to confirm this hypothesis and understand the correlation between consumer sentiment on inflation and their perceptions of the economy as a whole.

University of Michigan consumer sentiment data for May 2024 (preliminary)

• The preliminary University of Michigan Consumer Sentiment Index for May came in significantly below expectations, at 67.4 points compared to the estimated 76.0 points.
• This marks a notable decline from the previous month’s reading of 77.2, indicating a substantial drop in consumer confidence.

Breaking down the components of the UoM index:

• Expectations for future economic conditions fell to 66.5, compared to the expected 75.0 and the previous month’s reading of 76.0.
• Assessments of current conditions decreased to 68.8, down from the previous month’s 79.0.

Additionally, UoM inflation expectations increased:

• One-year inflation expectations rose to 3.5% from 3.2% last month, reaching their highest level since November 2023.
• Five-year inflation expectations increased to 3.1% from 3.0% last month.

Overall, these UoM consumer sentiment numbers suggest a significant decline in the sentiment, coupled with heightened concerns about inflation. This data may indicate growing pessimism among US consumers regarding the economic outlook and their personal financial situations, as inflation expectations grow, which could impact consumer spending and overall economic activity.

EUR/USD Live Chart