AUD/USD: Fed's shift toward targeting average inflation to keep the aussie stronger for longer – Westpac

Fed Chair Powell outlined a historic shift toward targeting average inflation outcomes, a development that will see the Fed let inflation and employment run moderately hotter than would have previously been the case. If the Fed keeps US policy looser for longer, then expect the aussie to remain stronger for longer, per Westpac. 

Key quotes

“Fed Chair Powell outlined a historic shift toward targeting average inflation outcomes, a development that will see the Fed let inflation and employment run moderately hotter than would have previously been the case.”

“The Fed usually taps the brakes when inflation starts to rise close to 2% and the economy is approaching full employment. Under this new strategy, the Fed is likely to keep rates low even longer, hoping for higher inflation to make up for past undershooting. The Fed has already committed to keeping interest rates near zero for several years. The new strategy likely extends that even further.”

“The change in the Fed’s framework was widely anticipated and markets took the news mostly in stride. But the real impact will play out in the years ahead. The Fed’s policy shift should cement a supportive global policy backdrop for possibly many years to come and if the Fed keeps US policy looser for longer, then we should expect the AUD to remain stronger for longer.”

“The aussie has been mostly rangebound so far in August but looks set to resume its uptrend. A weak USD is one of the key reason to raise our AUD/USD forecasts to 0.75 by end-2020 and to 0.80 by end-2021.”