BREAKING: EURUSD dips after big surprise in UoM inflation expectations

•  - USD Michigan 1-Year Inflation Expectations
  • Actual: 4.3%. Forecast: 3.3% | Previous: n/a
•  - USD Michigan 5-Year Inflation Expectations
  • Actual: 3.3%. Previous: 3.2%

The surprising UoM data caused the dollar to strengthen temporarily, while the US100 fell on tariff concerns. A powerful increase in one-year inflation expectations. While these levels are not far from what we have seen in recent years due to high inflation, the gain itself is the largest since 2008. In response, we are seeing a marked reaction in both the dollar and US indices. This gives the Fed an excuse to change its mind on inflation expectations. So far, Powell has talked about well-anchored expectations. Of course, looking from a 5-year perspective, not much changes here. However, one-year high expectations could turn into long-term expectations of elevated inflation clearly above target. In that case, we would have a situation in which the Fed would have an excuse not to cut interest rates anymore. 

US 1 year inflation expectations showing some real tariff fears. Source: University of Michigan