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Historic changes at Fed didn’t hasten dollar’s recovery

USD - United States Dollar

The US dollar responded as one might expect after the head of its central bank announced major policy shifts that could keep interest rates lower and allow inflation to increase past 2%.

The US dollar dropped half a percent against the euro, Great British pound, Australian dollar and Canadian dollar when Federal Reserve Chairman Jerome Powell released changes to a policy blueprint drafted in 2012. Since the announcement, the US dollar has corrected and is in positive territory for the day against the same currencies.

In a “robust update” to the Fed’s Statement on Longer-Run Goals and Monetary Policy Strategy, two main takeaways could influence the dollar in the long term:

  • The Federal Reserve will maintain an average inflation rate of 2%, and thus allowing it to go above or below that rate as necessary.
  • It shifted is analysis of the employment to focus on the lower end of the income spectrum.

What will the dollar do with this change? In the long term, many commentators believe it could strengthen the dollar. The 2% average inflation rate may set the stage for lower interest rates and make it more difficult to for rate hikes. This would allow the Federal Reserve to continue lending at historically low rates in order to push the economy forward.

In the short term, it’s the first time since March that the currency markets weren’t trading on virus related news.

Expected Ranges

EUR/USD: 1.177 - 1.189 ▲

GBP/USD: 1.317 - 1.327 ▲

AUD/USD: 0.722 - 0.728 ▲

USD/CAD: 1.310 - 1.316 ▼