US Consumer Confidence Preview: Near-term relief or more risk aversion?

• US CB Consumer Confidence is expected to have improved further in September.
• Record high inflation is likely to have taken its toll on households’ sentiment.
• USD bullish case will likely continue regardless of the outcome of the report.

The US Conference Board Consumer Confidence is expected to have improved further in September, foreseen at 104.0 in September after posting 103.2 in August, the index declined between May and July, bottoming at 95.3. The index is usually seen as a leading indicator of consumer spending, a critical measure of the country’s economic health.

In August, the sub-index measuring the Present Situation sub-component improved to 145.4 from 139.7, while the Expectations Index increased to 75.1 from 65.6.

US inflation remains at record highs, potentially undermining household sentiment. According to the Bureau of Labor Statistics, the annual Consumer Price Index hit 8.3% in August, better than the multi-decade high reached in June at 9.1%. However, core inflation jumped to 6.3%, rising from an annual rate of 5.9% previously. Financial markets entered risk-off mode with the release, maintaining the sour tone despite the US Federal Reserve delivering a third consecutive 75 bps rate hike afterward.

What’s going on?

Little did we know that the virus that hit Wuhan at the end of 2019 would be the root of a global recession. The pandemic that spread like wildfire in early 2020 resulted in the worst economic setback in decades. The initial lockdowns meant to prevent contagions halted global trade. And putting the machine back to work has been tougher than anticipated. Supply chain issues and bottlenecks sent prices up, but at the time markets were coming to balance, Russia decided to start a war with Ukraine.

All of these scenarios caught policymakers and governments off guard. Ultra-loose financial conditions, brought in to deal with the first stages of the coronavirus pandemic, are now being quickly reversed, but massive rate hikes tend to slow economic growth. The United Kingdom was the first economy to acknowledge recession, while US authorities have tended to talk down the idea, despite two consecutive Gross Domestic Product contractions.

What’s coming next?

Last week, US President Joe Biden said that the COVID-19 pandemic was over. But is it? The number of new contagions reached a record high in January this year, and while new cases and deaths have decreased significantly, the WHO does not believe we have left the pandemic behind. On average, there are 400 coronavirus-related daily deaths in the US. Lovers and detractors all face the same challenges with jobs, salaries, and inflation.

The US may be doing better than other major economies. Consumer Confidence may have bounced in September. But at the end of the day, the risk of recession remains high, and inflation seems indifferent to policymakers’ aggressive actions.

More uncertainty and a steeper economic setback is on the cards for this year and the next one and there is little that the authorities can do about it.

USD possible scenarios

Indeed, an upbeat outcome of the Conference Board report could bring temporal relief to financial markets, but such optimism should not last long. Anyway, it could help Wall Street recover, with a better market mood, probably resulting in a USD decline.

A worse-than-anticipated result could end up fueling the greenback by spurring additional risk aversion.

The DXY hit a record high of 114.67 on Monday, trimming intraday gains but still bullish according to the daily chart. The index will likely maintain the current momentum and has room to extend its advance beyond 115.00 on the back of the report.  A corrective decline towards 110.00 may take place if the Dollar index breaks below 112.90, the immediate support level.