US Consumer Sentiment Preview: Dollar set to decline on falling inflation expectations

Crying all the way to the cashier – that is how consumer surveys can be described in 2022. The University of Michigan's Consumer Sentiment Index stood at a low level of 56.8 points in November, and economists expect another slide to 53.3 in the preliminary read for December. Nevertheless, Black Friday shoppers continued busting doors. 

I also want to stress that the UoM tends to reflect the political mood – Democrats are much more optimistic about the economy than Republicans in the past two years. It was the other way around before the 2020 elections. However, this survey's 5-year inflation expectations gauge is already a gem that moves markets. Why? Because Federal Reserve Chair Jerome Powell highlighted its importance. 

Back in November, Americans' long-term inflation expectations hit 3%, the highest since June, but below the cycle peak of 3.1%:

Source: FXStreet

Market environment and reaction

Investors are becoming nervous ahead of next week's all-important Federal Reserve meeting, the last of the year. The bank is set to raise rates by 50 bps, but its projections for future rates remain unknown. Will the terminal rate top 5% or remain below it?

The US Dollar has been rising in fear of a hawkish message from the Fed, reversing falls recorded in the previous week. The UMich survey is the last data point of the week and may trigger last-minute repositioning ahead of the weekend. 

After a positive week for the Greenback, some profit-taking would be the natural reaction – but the data need to support it. A mere repeat of 3%, without any unwanted acceleration in long-term inflation expectations, could suffice to down the Dollar. 

There is room for an even more significant fall. Why? US gasoline prices have been dropping, and that impacts Americans' minds. Yes, the survey is about five years forward, but we humans have a recency bias, and gas stations serve as giant billboards. 

Final thoughts

The University of Michigan's preliminary Consumer Sentiment Index gauge for December has the last word of the week, and its long-term inflation expectations is especially eyed after the Fed highlighted its importance. Investors might want to take profits on weekly Dollar gains and a drop in gasoline prices points to a weaker read, further weighing on the Greenback. 

The UMich data is released after the Producer Price Index (PPI) report, which could also show softer inflation in the pipeline, according to the economic calendar. One weak data point may be insufficient to topple the Dollar – the second blow could be decisive.