The Federal Reserve has a new inflation strategy. Instead of focusing on curbing price pressure, this strategy will now allow inflation and labor to exceed their targets in order to achieve long-term market stability. This new approach follows a decade of inflation.
It has fallen short of its 2% target. Even before COVID-19, the Fed was planning this shift in focus. This new decision was created after more than a year analyst done by them. It is also led to a new phase for the central bank.
In the USA itself, the condition starts to get better. The number of unemployed is now starting to decrease slowly. Meanwhile, the personal income and personal expense numbers are scheduled for release tomorrow. The optimistic tone of Powell’s speech also makes everything better.
The COVID-19 pandemic provides the Fed with an even stronger reason to turn as an economic slowdown undoes any potential inflation recovery. With today's announcement, the Fed informs that zero interest rates are still possible. Below is the analysis for the USD after the Jackson Hole rally.
Fed Announcement already Measures Cuts (priced in)
Although the dollar shot lower when Fed Chair Jerome Powell first made his announcement, it was reversed shortly thereafter. One of the main arguments for this reversal is that it is widely expected. This kind of situation was discussed in various sources.
There is a strong reason for it. The investors have been looking for the central bank to turn to its average inflation target, which is the word Powell is currently using. Investor found out that there were no surprises in his speech.
That is why; investors again took profits on the high beta currency. Besides, Powell also made an interesting decision about low-interest rates. It triggers the positive movement in the market, especially for USD as the major traded currency in this world.
The dollar rallied as Investors Returned to US Assets
The promise of cheap money and sufficient liquidity also attracts investors to US assets. In turn, it is for the US dollar. It's hard not to be attracted by the record-breaking moves in US stocks. The Fed's new policies will help boost the economy.
This policy will allow the positive economy to run longer. The dollar also has a strong correlation with bond yields, and a nearly 8% increase in the 10-year rate contributed to the rally. The outlook for a year of low-interest rates is very positive for stocks.
This situation also explains why the S&P 500 is hitting new record highs. Despite the fact that the accommodative policy guidelines can be negative for the US dollar, the dollar has risen sharply against the EURO and Japanese Yen.
You and many other traders may have been waiting for Powell's cautious comment. On the other hand, his comments were a little more optimistic. The Fed chairman described the economy as healthy, regardless of virus-hit areas. US data is also better with Q2 GDP revised slightly higher.
The Japanese yen Currency was hit the Hardest by the dollar's rise
Given the USD / JPY correlation with 10-year rates, it should come as no surprise. Japanese Prime Minister Shinzō Abe is also scheduled to hold a press conference tomorrow. Many are wondering if he will step down due to health concerns.
The euro underperformed as virus cases in France and Spain surged at an alarming rate. The Canadian dollar is the strongest. Investors should thank stronger current account numbers and better prospects for monthly GDP. Pending home sales broke expectations and jobless claims continued to decline.
The Australian and New Zealand dollars recovered most of their losses after Powell's statement. The new focus on Europe makes Asian currencies is more attractive. Sterling, on the other hand, fell behind as UK virus cases climbed to their highest since June.
