The preliminary Michigan Consumer Sentiment Index for December is expected to increase to 52 from November’s three-year low of 51. Despite this anticipated rise, consumer confidence remains historically low due to a stagnant labour market and high prices.
November’s data showed current economic conditions dropping from 58.6 to 51.1, although economic expectations slightly improved to 51 from 50.3. The UoM Consumer Sentiment Index assesses US consumers’ views on finances, business conditions, and purchasing plans, serving as a forward-looking indicator of economic trends.
Impact Of The Government Shutdown
December’s release follows a record-long US government shutdown, with expectations that consumer sentiment will show a slight improvement. Household consumption, constituting about two-thirds of the US GDP, underscores the index’s value in forecasting economic trends.
Persistent high prices and lower incomes were cited as key factors affecting sentiment, despite future inflation trends appearing to moderate. While the expected improvement may not bolster the struggling US Dollar, the index remains a vital economic measure.
The US Dollar has underperformed due to dovish Federal Reserve comments and weak economic indicators, spurring speculation of an interest rate cut. Market analyst Guillermo Alcala noted that the US Dollar Index’s recent performance has failed to rally past key resistance levels.
Given today’s expected data, we see the minor forecast improvement in consumer sentiment from 52 to 51 as insignificant. The bigger picture is that confidence is hovering near historic lows, not seen since the inflation spike of 2022. This persistent weakness confirms our bearish outlook on the US economy and, by extension, the US Dollar.
A Falling Dollar Strategy
We remember how the labor market showed clear signs of stalling throughout 2024, with monthly job creation falling below 150,000 in the second half of that year. That trend has continued, and coupled with inflation that has struggled to get below 3.5%, it has drained consumer wallets. This long-term erosion of purchasing power is the real driver behind the sentiment numbers we are seeing now.
The Federal Reserve is clearly reacting to this slowdown, and we anticipate they will cut interest rates later this month. This policy move is creating a significant divergence from other global central banks, which have largely finished their easing cycles. This divergence is the primary reason the dollar was the worst-performing G8 currency last month, a trend we expect to continue.
For the coming weeks, we should consider strategies that profit from a falling dollar. Buying put options on the US Dollar Index (DXY) or on USD futures provides a direct way to position for further declines. Alternatively, going long on futures for currencies like the Euro or Swiss Franc against the dollar could offer strong returns as this policy gap widens.
The technical breakdown of the DXY below the key 99.00 level last week was a major bearish signal for us. We should now be watching for a slide towards the 98.57 and 98.00 support levels. Any short-term strength in the dollar following today’s announcement should be viewed as a selling opportunity, not a change in the underlying trend.
