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

• US Consumer Sentiment is seen improving a tad in August.
• Investors' attention should also gyrate around inflation expectations.
• So far in August, the US Dollar Index has remained weak.

On Friday, the US gets the first look at August's University of Michigan Consumer Sentiment Index. This monthly survey gauges households' perceptions of the economy's trajectory. A final reading follows two weeks later.

The release breaks down into several measures. There's the Current Conditions Index and the Consumer Expectations Index -- plus the parts markets really watch: one-year and five-year inflation expectations.

In July, sentiment improved to a five-month high at 61.7 from May's 52.2, which also was the lowest level since the summer of 2022. Still, on the bright side, the Current Conditions component ticked higher to 68.0, although Expectations eased to 57.7.

Inflation expectations in focus amid tariff limbo

Looking closer, the one-year inflation outlook extended its downward trend in July, down to 4.5% following June's 5.0% increase and May's 6.6% gain, the highest level so far this year. In the longer run, the five-year gauge eased to 3.4% in July, clinching its third consecutive monthly decline.

Still, consumers seem unconvinced of a lasting pass-through of inflation-related tariffs into their daily expenses, in a context where the White House's trade policy does not appear to be navigating in the clear either.

The U-Mich survey will land just after July's US Inflation Rate, which showed the headline Consumer Price Index (CPI) holding steady at 2.7% from a year earlier, while the core CPI increased to 3.1% compared to the same month in 2024, reinforcing the persistence of domestic inflationary pressure and the cautious approach taken by the Federal Reserve (Fed).

How can the UoM report affect the US Dollar?

The Greenback maintains a downward trend so far in August, prompting the US Dollar Index (DXY) to slip back to the sub-98.00 region following multi-week highs north of the psychological 100.00 barrier recorded on August 1.

The US Dollar's decline in the past few weeks has accelerated due to prospects for a couple of interest rate cuts by the Fed, likely in September and December, along with President Trump's efforts to transform the Fed into a more dovish institution. Looking at the wider picture, the idea of a weaker currency to incentivise the country's competitiveness has been weighing on the Greenback since "Inauguration Day".

Senior Analyst at FX Street, Pablo Piovano, argues that if DXY clears its multi-year trough at 96.37 (July 1), the index might then challenge the February 2022 base at 95.13 (February 4), ahead of the 2022 valley at 94.62 (January 14).

In the opposite direction, the immediate barrier sits at the August ceiling of 100.25 (August 1), while a surpass of this region could pave the way for a potential visit to the weekly top at 100.54 (May 29), prior to the May peak at 101.97 (May 12).

Momentum indicators also give mixed signals: the Relative Strength Index (RSI) has dropped to around 44, suggesting the likelihood of extra losses in the near term, while the Average Directional Index (ADX) is nearing 13 and points to a weak trend.