Consumer confidence in the US declined slightly in early October. The University of Michigan’s Consumer Sentiment Index dropped to 55 from 55.1 in September, exceeding the expected 54.2. The Current Conditions Index rose to 61 from 60.4. However, the Expectations Index fell to 51.2 from 51.7. Importantly, the 1-year Consumer Inflation Expectation dropped to 4.6% from 4.7%, while the 5-year expectation remained steady at 3.7%.

Market Reactions

This data release had little impact on the markets. The US Dollar Index fell slightly by 0.08%, landing at 99.30. Over the week, the US Dollar strengthened against the Japanese Yen but weakened against key currencies like the Euro and Pound, which were down 1.30% and 1.25%, respectively. The full release of the Michigan Consumer Sentiment Index and Consumer Inflation Expectations data is expected to provide more insights. This is particularly relevant as the market anticipates changes in currency dynamics and potential Federal Reserve interest rate cuts. The EUR/USD is expected to face challenges, struggling to maintain above the support level at 1.1600, which could lead to further declines. Consumer sentiment remains weak, just barely holding at 55.0. This is consistent with the latest jobs report showing only 95,000 payrolls added in September 2025. This cooling labor market indicates that consumer spending, a vital part of the economy, may slow down in the fourth quarter.

Inflation and Federal Reserve Outlook

While consumers expect one-year inflation to ease to 4.6%, the latest official Consumer Price Index (CPI) remains stubbornly at 3.9%. This situation is putting pressure on the Federal Reserve, with markets now predicting a 75% chance of a rate cut next month. This possible policy change has become the main focus for the market. With the conflicting signs of stubborn inflation and a slowing economy, market uncertainty is evident in the VIX, which is above 22. This suggests higher options premiums, creating opportunities for traders. They might consider strategies that benefit from significant market moves or declines in volatility after the Fed meeting. The US Dollar is performing well against the yen but is weaker against European currencies. Global uncertainty offers some safe-haven support, but the prospect of a Fed rate cut limits its strength. This tug-of-war means currency pairs like EUR/USD, currently hovering around 1.1600, are sensitive to upcoming data. We are witnessing a situation reminiscent of late 2023, when the market anticipated the end of interest rate hikes. At that time, forward-looking assets rallied sharply once the pivot was confirmed. Traders who anticipate a similar dovish shift from the Fed could be in a favorable position in the coming weeks. Create your live VT Markets account and start trading now.

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