Consumer Sentiment Slumps Due to Inflation, US Dollar Corrects

The University of Michigan reported its worst US consumer sentiment reading since November 2011. This pulled the US dollar index back from a record 16-month high.

The US dollar index (DXY) continued the retreat that had been going on since last Friday to land around 95.00 in trading this Monday (15/November).

Market participants continue to look for new clues regarding expectations of a Fed rate hike, while monitoring various other events that will take place over the coming week.

The trigger for the current USD pullback lies in the consumer confidence data released last Friday.

The University of Michigan's November 2021 Consumer Sentiment Index fell from 71.7 to 66.8, with the current conditions sub-index slipping from 77.7 to 73.2 and the consumer expectations sub-index dropping from 67.9 to 62.8.

This is the worst consumer sentiment figure since November 2011.

Consumers are increasingly pessimistic due to the ongoing surge in inflation, as well as the assumption that no effective policies have been implemented to reduce the impact of the inflation spike.

On Tuesday, the US Census Bureau will release retail sales data, which usually has a big impact on the forex market.

The position of this data is increasingly important after the release of disappointing consumer sentiment, because the market will find out whether consumer disappointment has started to have an impact on the economy or is only at the discourse level.

"It will be important to see what consumers who still have a lot of money will do, rather than what they say," noted Ray Attrill, head of FX strategy at National Australia Bank. Attrill noted that consumer sentiment data was at odds with consumer spending data in the summer.

Strategists from Westpac have a more optimistic outlook.

They noted that the US dollar index is gaining momentum following the release of last week's fantastic inflation data.

The Fed's tapering, US federal infrastructure budget, and tightening US labor market are also supportive for the US dollar.

They believe that the upcoming retail sales may appear bright, so the weakening of the dollar index to enter the mid-93's actually opens up buying opportunities.

Outside of these topics, geopolitical issues began to surface.

US President Joe Biden and Chinese President Xi Jinping will hold a virtual summit tomorrow.

The meeting is expected to improve relations between the two countries.