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U.S. Consumer Confidence Improves, Currencies Resume Advance On Risk

U.S. Consumer Confidence Improves, Currencies Resume Advance On Risk

2011-09-27 14:23:00
David Song, Currency Strategist
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THE TAKEWAY: U.S. Consumer Confidence Rebounds > Raises Outlook For Private Sector Consumption > Markets Continue To Move On Risk Appetite

The Conference Board’s U.S. Consumer Confidence survey advanced to 45.4 in September amid forecasts for a 46.0 print, but market participants showed a fairly muted reaction to the report as the European debt crisis takes center stage. The rebound in household sentiment reinforces an improved outlook for the world’s largest economy as private sector consumption remains one of the leading drivers of growth, and conditions may improve throughout the remainder of the year as the Federal Reserve steps up its effort to stimulate economic activity.

The breakdown of the report showed a downtick in inflation expectations, as households see price growth averaging 5.7% over the next 12-month, which compares with 5.9% back in August, while the gauge for the next six-months increased to 54.0 from 52.4 in the previous month. However, the ongoing weakness in the labor market paired with fears of a double-dip recession may continue to bear down on household sentiment, and the FOMC may take additional steps to balance the risks for the region in an effort to encourage a sustainable recovery.

U.S._Consumer_Confidence_Improves_Currencies_Resume_Advance_On_Risk_body_ScreenShot139.png, U.S. Consumer Confidence Improves, Currencies Resume Advance On Risk

The EUR/USD advanced to a fresh daily high of 1.3655 following the report, and the pair may continue to recoup the losses from the previous week as the data appears to be fueling risk appetite. As the rebound from 1.3362 gathers pace, the euro-dollar looks as though it will work its way back towards the 61.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3880-1.3900, but the near-term outlook for the single-currency remains bearish as the fundamental outlook for Europe deteriorates. The heightening risk for a double-dip recession has sparked speculation for additional monetary support, and it seems as though the European Central Bank will expand its nonstandard measures at the next policy meeting on October 6 in an effort to shore up the financial system. As the ECB continues to delay its exit strategy, speculation for further easing is likely to bear down on the exchange rate, and the near-term rally in the EUR/USD could be short-lived as market participants expect the Governing Council to bring the benchmark interest rate down from 1.50%.

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