- Summary:
- EURUSD runs higher as the Fed signals lower rates for longer. The switch to average inflation targeting is a dovish signal for the USD.
The EURUSD pair reacted strongly to the Fed’s message at the Jackson Hole Symposium. It blew stops on both extremes, before grinding higher in the Asian session.
It did not make a new high (yet) compared with the previous 1.1965, but it does trade with a bid tone. In fact, just like other USD pair, it faithfully reflects the dollar’s offered tone on the FX dashboard.
Average Inflation Targeting in the United States
Fed announced yesterday it plans to let inflation overshoot its 2% target. By targeting average inflation instead of a fixed rate of it, the Fed signals that it will keep interest rates lower for longer. Hence, the dovish USD reaction.
For example, prior to yesterday’s communication, the Fed tightened monetary conditions should inflation expectations pointed close to the 2% level. But now, even if inflation exceeds the 2% previous target, the Fed will look for the average (i.e., past, current, and future) inflation to reach 2%.
Yesterday’s speech lacked more details in regard to what “average” means for the Fed. However, in time, market participants will find out what changes at the Fed’s end, especially on the next FOMC Meeting when we will see the staff projections too.
The decision by itself is a game-changer for monetary policy frameworks around the world. The Fed is not the only central bank failing to bring inflation to the target in the last years. Hence, other jurisdictions may adopt a similar framework in time.
In any case, Powell had a difficult job yesterday – trying to explain why inflation is a good thing. The markets usually have the final say.
EURUSD Technical Analysis
Despite the USD offered tone, the EURUSD daily price action resembles a head and shoulders formation. 1.1750 acted as the neckline, and that is the break bears will want to see before going short and placing a stop loss at the highs. For the take profit, consider a risk-reward ratio of 1:2 or 1:3.
EURUSD Price Forecast
