Introduction
Changes in Consumer Confidence drives macroeconomic indicators like Consumer Spending, which is a significant driver for Gross Domestic Product. Understanding what Consumer Confidence Surveys mean and imply are essential for predicting current and upcoming economic conditions. When understood properly, Consumer Sentiment can give us a hint regarding the direction of economic activity as an advanced or leading indicator.
What is Consumer Confidence?
The Consumer Confidence Statistics reflects the outlook of consumers on the future economic conditions and their financial status. The uniqueness of this indicator lies in the fact that this is a very subjective indicator and may be biased to some extent as it depends largely on the people’s opinion. Two people having the same current job and financial status may give a different outlook on it, but since the scope of the survey is broad, it irons out such exceptions and inconsistencies.
Consumer Confidence reflects how positive or negative people are feeling towards their future in the context of financial security, income, and employment. It is essentially a measure of the Consumer Sentiment in economic and monetary terms.
The numbers shown by Consumer Confidence surveys are not some monetary numbers derived from calculations, but instead, they are opinions rated on a scale in a numeric form similar to how we give a rating to movies on corresponding websites with stars or a ranking from 0-10.
How is Consumer Confidence scaled and assessed?
There are two major survey reports which show Consumer Confidence:
Consumer Confidence Index
It is released monthly by the Conference Board and reflects the general public’s expectations about their economic prospects for the next six months. The Conference Board expertise in these types of surveys (watching Consumer Spending and Buying habits) and take into account a plethora of data and survey information into account (about 5000 households) for their indices. Hence, it is considered a very reliable indicator by many.
Consumer Confidence Index is composed of the Present Situation Index, intended to be a coincident or current economic indicator, and the Expectations Index, expected to indicate future financial health.
Consumer Sentiment Index
The University of Michigan releases a preliminary report on the second Friday and a final report on the fourth Friday of every month. Their Consumer Research center conducts a telephonic survey asking 500 consumers a series of questions on personal finances and their opinions on business conditions. Two components, namely, Expectations Index and Current Conditions Index, make up the questions of Consumer Sentiment Survey.
Is Consumer Confidence necessary for our analysis?
The idea behind Consumer Confidence Surveys is that when consumers are confident of their economic prospects, they will spend more on personal expenses beyond the basic needs. For instance, when you assuredly receive 100$ daily, and the necessary daily requirements are taken care of with 50$. Naturally, we will spend the remaining 50$ for personal enjoyment as the next 50$ take care of tomorrow’s primary needs. In another case, if we were to receive the same 100$ on alternate days, then that money goes only for basic requirements, which cuts off the personal enjoyment expenditure.
Consumer Confidence drives Consumer Spending, which is more than a two-third component of GDP. Consumer Spending is the maker of GDP, and Consumer Confidence is a prime component of Consumer Spending.
How can Consumer Confidence be Used for Analysis?
The University of Michigan’s Consumer Sentiment Index historical data goes back to 1978, which is pretty decent for an economic indicator. Historically it has shown an excellent 85% correlation with the GDP growth rate, and this is a remarkable percentage to rely on these survey indices as leading indicators for the economy’s direction.
A low Consumer Confidence Index is a danger sign showing what is the probable economic crisis ahead in extreme cases. Weak confidence indicates there is a threat to the economy, and a contraction is on its way. Central Authorities may also use this to take corrective measures to change this. On the contrary, A healthy Consumer Confidence Index signals an economic expansion on its way, which stimulates growth and improves the standard of living of the citizens. Consumer Confidence can also be used by businesses to identify recessionary periods and take appropriate steps to minimize their risk and adapt accordingly.
Traders and Investors will always benefit the most from the leading or advanced indicators in comparison to coincident or lagging indicators. With such strong confidence leading indicators, we can significantly reduce our risk on financial investments and come out of trades before the danger signals manifest in the economy or go into the market and ride the economic growth ahead of others.
Sources of Consumer Confidence Indices
The Conference Board, which is a not-for-profit organization, has excellent data analysis for Consumer Confidence Indices. We can go through their surveying methodologies, historical records, samples on their official website. A sample issue of Consumer Confidence Survey pdf file can be found here.
The Michigan Consumer Sentiment Index numbers and corresponding data can be found here. The same is available on the St. Louis FRED website, where we can perform graphical analysis and plot against GDP rates for better understanding.
Impact of the Consumer Confidence news release on the price charts
After understanding the Consumer Confidence economic indicator, we will now extend our discussion and analyze the impact of the same on the currency. It is a leading indicator that measures the overall economic activity. The reading is compiled after carrying out a survey of about 5000 consumers, which asks them to evaluate future economic prospects. When respondents give high ratings, it shows consumer optimism. Consumer Confidence data does not have a major effect on the monetary policy and the decision of policy-makers. Hence it does not cause severe volatility in the currency pair.
For illustrating the impact, we have considered the Consumer Confidence data of Europe, which is published by the European Commission. The below figure shows the previous, forecasted, and actual Consumer Confidence data in the Euro Zone, which was collected for the month of March. It shows that there was a decrease in the value from the previous month but higher than what was expected. A higher than expected reading is believed to be positive for the currency while a lower than expected reading is considered to be negative.
EUR/AUD | Before The Announcement
We begin our analysis with EUR/AUD, where the above chart shows the state of the currency pair before the news announcement. We see that the market is moving in a range and currently is at the bottom of the range. Since the impact of the news release is less, we need to rely more on technical analysis and trade based on technical indicators, rather than on the outcome of the news. Technically we are at the bottom of the range, so positive Consumer Confidence data is the ideal case for going ‘long’ in the currency pair.
EUR/AUD | After The Announcement
After the Consumer Confidence data is released, volatility in the market increases on both sides, and the candle closes, forming a ‘Doji’ pattern. The reason behind this indecision is that the Consumer Confidence numbers were better than before but lesser than the forecasted numbers. Some traders took this to be positive, while some felt the numbers were not too great. From the trading point of view, since the market does not break the ‘support’ area, one can enter for a ‘buy’ with a ‘take-profit’ near the ‘resistance’ area.
EUR/JPY | Before The Announcement
EUR/JPY | After The Announcement
The above images represent the EUR/JPY currency pair, and the characteristics of this pair appear to be very different from that of the above-discussed pair. Before the announcement, the market is in a strong uptrend and currently at a point from where the market had reversed earlier. As the market is at a critical point, it is better to wait for the Consumer Confidence data and then trade based on the change in volatility.
After the news release, the price initially goes up but later gets sold into and closes in red. We need to note here that even though the market reaction was bearish, the price did not break the moving average. Instead, volatility increases on the upside and results in a continuation of the trend. One can trade the above pair after price retracement to an appropriate Fibonacci level and then taking a ‘buy.’
EUR/NZD | Before The Announcement
EUR/NZD | After The Announcement
Now we shall discuss the impact of Consumer Confidence data on EUR/NZD currency pair. The behavior of the chart is similar to that of the EUR/AUD pair where here also the price is moving within a range, and recently the price has broken below the range. Since the selling pressure has increased, it can be risky to go ‘long’ in the market, even if the data proves to be positive for the economy.
After the news release, the market moves higher as a consequence of positive Consumer Confidence data, and the price closes, forming a bullish candle. As mentioned earlier, going ‘long’ can be risky due to the increased selling pressure, and thus conservative traders should not take such trades. Another reason why the up move might not be sustainable is that the impact of Consumer Confidence data on currency is not as much.
That’s about Consumer Confidence and its impact on the Forex Market. Let us know if you have any questions in the comments below. Cheers.