Consumer confidence in the US improved in July. The University of Michigan’s initial Consumer Sentiment Index rose to 61.8, beating the expected 61.5 and up from 60.7 in June. The Current Conditions Index climbed to 66.8 from 64.8, while the Consumer Expectations Index went up to 58.6 from 58.1. Additionally, 1-year Consumer Inflation Expectations fell to 4.4% from 5%, and 5-year expectations dropped to 3.6% from 4%.

Impact on the US Dollar

After this report, the US Dollar faced downward pressure. The USD Index fell by nearly 0.5%, reaching 98.15 at the time of reporting. The key takeaway for traders, based on the University of Michigan’s report, is not just the boost in sentiment, but the significant decline in inflation expectations. This indicates that the Federal Reserve’s strategy of raising interest rates is effectively managing price pressures. As a result, the chances of more aggressive rate hikes have greatly decreased. We can see this change reflected in the interest rate futures markets. The CME FedWatch Tool shows that traders have significantly reduced their predictions for several rate hikes this year. This is supported by recent Consumer Price Index (CPI) data, which revealed inflation slowed to 3.0% in June, the lowest in two years. This suggests that the central bank’s work is nearly complete.

Effects on Currency and Equity Markets

For currency traders, this news will likely put more pressure on the US Dollar. A less aggressive central bank makes a currency less appealing, which is evident as the Dollar Index (DXY) recently dropped below the crucial 100 level for the first time in over a year. We recommend using options to position for further weakness against currencies like the Euro or the Yen in the upcoming weeks. This situation is generally favorable for equity markets, as fears of rising interest rates ease borrowing costs and enhance corporate valuations. Historically, markets tend to rally when investors believe a rate-hiking cycle is coming to an end, which contrasts sharply with the sell-off experienced throughout 2022. We see potential in buying call options on broad market indices like the S&P 500, expecting a continued relief rally. Lastly, the market’s fear gauge, the VIX index, has been trading near its lowest levels since before the pandemic, recently staying below 14. This indicates less anxiety and smaller expected market fluctuations. Thus, strategies aimed at benefiting from stable or declining volatility may be favorable for traders. Create your live VT Markets account and start trading now.

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