28th August 2020 - The Fed's inflation targeting policy shift put more weights on USD

Walid Salah Eldin

Active member
The greenback is still depressed by the Fed's inflation policy shift to allow the inflation level to rise above 2% to compensate the period of having this rate below 2%.

The Fed's Chief Jerome Powell's dovish message from Jackson Hole paved the way for accepting higher inflation rate, before intervening to raise the interest rate to curb it.

The higher inflation rate can boost the demand for gold as a hedge against inflation over the coming months following the economic recovery from the negative impact of corona virus pandemic, while the Fed will be looking to compensate the period of struggling during the crisis when the inflation dampened down below its 2% yearly target.

The greenback came easily under pressure versus its rival currencies and it is now trading near 1.327 versus the British pound, While EURUSD is now trading above 1.19.

XAUUSD has been exposed to volatility yesterday pushed it up to 1976$ per ounce before dragging it down to 1910$ where it managed to rise again to the current level close to 1950$, as the Fed will allow USD to fall over higher inflation level without raising rates.

Previously, the Fed was targeting 2% and the FOMC members said in their most recent meeting on last July 29 that The employment and inflation are still facing downside risks over the near term and there will be considerable risks to the economic outlook over the medium term.

The committee members did not take any action and refrained from placing yield capping targets as these targets would likely provide only modest benefits in the current environment as the minutes of that meeting have shown.

While the odds were rising to take such action as BOJ did on Sep. 21, 2016, when it decided to place 10yr JGB yield target near Zero percent to fight deflation and raise the prices.

The Fed's inflation targeting shift can keep the interest near zero percent for years to come with no change and it can be easily followed by other central banks and these all can pour in the benefit of gold and weigh down on the currencies buying power.

This policy can also boost demand of the US equities which are actually considerable boosted by the previous taken measurements and government reflation plans which can reach 4 trillion in case of reaching a new bipartisan deal. While Both of S&P 500 and Nasdaq 100 are making new highs and also gold can be better buoyed at dips!

While the treasuries yields cannot capture the advance of the economic recovery which can easily now produce higher inflation wages pressure and assets prices.

God willing the market will be watching ahead today the release of Jul US PCE deflator which is expected to show yearly increasing by 1.2% after 0.8% in June, while The core PCE figure excluding food and energy which is the Fed’s preferred gauge of inflation is foreseen to be up by 1.1% after rising by 0.9% in June.

US consumer spending figure which accounts for 70% of US GDP which be released too today and it is expected to show monthly rising in July by 1.5% following rising by 5.6% in June, with decreasing of the personal income by 0.2%, after falling by 1.1% in June.

Have a good day

Kind Regards

Global Market Strategist of FX-Recommends

Walid Salah El Din
AdBlock Detected

We get it, advertisements are annoying!

But it's thanks to our sponsors that access to Trade2Win remains free for all. By viewing our ads you help us pay our bills, so please support the site and disable your AdBlocker.

I've Disabled AdBlock    No Thanks