US UoM Consumer Sentiment Index is seen at 55.5 in March
- Consumer confidence eased a tad in early March.
- One-year inflation expectation held steady at 3.4%.
American consumer confidence deflated in early March, as households grew more pessimistic about current conditions and the broader economic outlook, according to preliminary data from the University of Michigan.
The closely watched Consumer Sentiment Index receded to 55.5 from 56.6 in the previous month, surpassing economists’ expectations (55) and signalling some weakening in public confidence.
Furthermore, the Current Conditions index ticked higher to 57.8 from 56.6, while the Expectations gauge dropped to 54.1 from 56.6, highlighting a downbeat scenario for the months ahead.
Inflation expectations, meanwhile, came in mixed: The one-year outlook held steady at 3.4%, and the five-year forecast eased to 3.2% from 3.3%.
Market reaction
The US Dollar remains well bid, adding to the ongoing move higher and sending the US Dollar Index (DXY) back above the key 100.00 hurdle, or multi-month highs.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Author
FXStreet Team
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