US Dollar Weakens as Consumer Confidence Slumps Amid Heightened Recession Risks

US CONSUMER CONFIDENCE KEY POINTS:

• U.S. consumer confidence falls to 102.5 in October from 107.8 in September, missing consensus expectations calling for a pullback to 106.5
• The slump in sentiment is caused by a sharp decline in the present situation index
• U.S. dollar trades lower after the survey results cross the wires

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A popular gauge of U.S. consumer attitudes worsened significantly at the start of the fourth quarter, a sign that Americans are turning more pessimistic about the future amid persistently high inflation, rising interest rates, and mounting recession risks. According to the Conference Board, consumer confidence fell to 102.5 in October from 107.8 in September, ending a two-month back-to-back recovery. Analysts polled by Bloomberg News were anticipating a more modest decline to 106.5.

Looking at the internals, the present situation index, based on the assessment of business and jobs market conditions, dropped sharply to 138.9 from 149.6, the weakest level since April 2021, pointing to heightened uncertainty about the health of the economy. Meanwhile, the expectations component, which tracks short-term prospects for income, the business environment, and employment opportunities retreated to 78.1 from 80.3, a disappointing development that raises the likelihood of a medium-term downturn.

Source: DailyFX Economic Calendar

Deteriorating sentiment is likely to weigh on spending, reducing household consumption, the main driver of U.S. economic activity. While this situation may lead to another negative GDP print in the fourth quarter, this is not entirely bad news for the U.S. central bank, as a weaker economy could help curb inflation through demand destruction.

Source: Conference Board

Immediately following the release of the survey results, the U.S. dollar extended its daily losses, with the DXY index down about 1% to 110.00, dented by the pullback in bond yields.

For most of 2022, the consumer had remained strong, but emerging signs that this could be about to change for the worse may give the Federal Reserve a reason to adopt a slightly less aggressive hiking bias. One month’s data does not set a trend, so traders should not draw broad conclusions yet, but continue to monitor incoming macro reports to better assess the path of monetary policy.

In recent days, a few Fed officials have toned down their ultra-hawkish rhetoric, with San Francisco Fed President Mary Daly indicating that the time has come to start talking about slowing rate hikes. This is not yet the consensus view at the central bank, but policymakers could coalesce around this message later this year if economic numbers begin to deteriorate more rapidly. This means that the U.S. dollar bull cycle could be on its last legs.

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—Written by Diego Colman, Market Strategist for DailyFX