UoM US Consumer Sentiment set to rise slightly as markets focus on inflation expectations

• Consumer Sentiment in the US is expected to remain subdued, according to the University of Michigan survey.
• The main focus will be on whether five-year inflation expectations continue to fall after declining in May for the first time since December 2024.
• The US Dollar Index may extend its slide to fresh multi-year lows.

The United States (US) will see the release of the preliminary estimate of the June University of Michigan's (UoM) Consumer Sentiment Index on Friday. The report is a monthly survey conducted by the University that gathers information on consumer expectations for the economy. Two weeks after the release of the flash reading, the UoM publishes a final estimate.

The report includes different sub-readings, which have lately impacted financial markets. On the one hand, it offers a Current Conditions Index and a Consumer Expectations Index. On the other hand, and more critical to financial markets, it offers one-year and five-year inflation expectations.

Consumer Sentiment, according to the UoM, stood at 52.2 in May, unchanged from April, after falling for four consecutive months. The Current Conditions Index fell to 58.9 from 59.8 in the same period, while the Consumers Expectations Index ticked modestly higher to 47.9 from 47.3.

Inflation expectations in focus after tariff woes

More relevant, the one-year inflation outlook component of the survey increased to 6.6% from 6.5%, while the five-year inflation outlook eased to 4.2% from the 4.4% posted in April.

The official report states: "This is the smallest increase since the election and marks the end of a four-month streak of extremely large jumps in short-run expectations," referring to the one-year inflation outlook, adding that the fall in the longer-term price outlook was the first since December 2024.

"Given that consumers generally expect tariffs to pass through to consumer prices, it is no surprise that trade policy has influenced consumers' views of the economy. In contrast, despite the many headlines about the tax and spending bill that is moving through Congress, the bill does not appear to be salient to consumers at this time," the report added.

The figures could have a significant impact on financial markets, particularly after the release on Wednesday of the May Consumer Price Index (CPI) figures. Inflation, as measured by the change in the CPI, rose to 2.4% on a yearly basis in May from 2.3% in April, below the 2.5% expected, according to the US Bureau of Labor Statistics (BLS).

Additional signs of easing inflationary pressures could revive confidence in the US economic performance and alleviate concerns related to tariffs.

How can the UoM report affect the US Dollar?

The US Dollar Index (DXY) plunged on Thursday to multi-year lows in the 98.70 region amid fresh trade and geopolitical tensions.

Despite easing US-China trade tensions, US President Donald Trump made some worrisome comments on Wednesday, stating that he was willing to extend the July 8 deadline for completing trade talks, but also added that he is ready to impose unilateral tariffs within two weeks.

The market sentiment also soured on renewed Middle East tensions. News indicate that Israel is preparing an operation against Iran, with the US expecting retaliatory measures. The headline came after US-Iran nuclear talks appeared to have halted.

Valeria Bednarik, Chief Analyst at FXStreet, notes: "The DXY is extremely oversold, according to technical readings in the daily chart, but there are no signs of downward exhaustion. Given that the slump is sentiment-driven, additional slides can not be ruled out. Speculative interest will look for reasons to keep selling the Greenback, although the DXY may recover ahead of the weekly close amid profit-taking."

Bednarik adds: "The DXY bottomed around the 97.70 on a weekly basis in March 2022, the immediate support area. Once below it, the index could extend its slide towards the 97.00 mark. Conversely, a recovery would see the index testing the 98.00 threshold, ahead of 98.35, where the DXY bottomed on June 5."