Ever wondered how sentiments of 500 consumers would affect the economy? It was in 1940 when Professor George Katona at the University of Michigan's Institute for Social Research initiated the idea of conducting telephone surveys in order to understand confidence levels of consumers in the economy. With a limited number of 50 core questions the survey analyses the personal view of a consumer’s own financial situation and how they view the US economy’s short and long term state.
Just like how human sentiments control every relationship, the consumer sentiment plays a leading role in the market. That is how the Michigan Consumer Sentiment Index emerged. Every time the survey results were published, the value of the Dollar began to fluctuate according to the rise and fall of the index. At the lowest point of consumer confidence. A bearish trend for the dollar was formed and recession followed. Similarly, when the confidence was regained it changed to a bullish trend and resulted in economic growth.
Before getting into a conclusion, one should also keep in mind that a very bullish consumer sentiment can affect the economy negatively. When the consumer confidence levels are high they tend to spend more which may lead to increase in prices of commodities and an unwelcome rise in inflation. This can adversely affect the economy.
Consumer sentiment is an important factor in the mix of forex fundamentals. This information is widely assessed by the central banks to identify the measures in controlling inflation. It is important to analyze the significant changes the consumer sentiments have brought into the economy.
The consumer sentiments can turn upside down in no time. For example, In January 2020, the Michigan Consumer Sentiment Index stood at 99.8 but after the initial lockdown due to pandemic, the index slid to 71.8 in April 2020. DXY was falling at this point of time. Even though this may not be the sole reason for the fluctuations in DXY, it is necessary to consider the index and make appropriate decisions.
The index shows a downward trend during this year. May 2022 recorded the lowest point of 58.4 over the past 5 years. This might lead to a significant change to the DXY. Therefore, it is very important for a participant of the currency market to analyze the consumer sentiments over the technical side. And one should analyze the index to take proper advantage as well as to save one’s self from significant losses.
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- Sinta Thomas
