28.08.202011:32 Forex Analysis & Reviews: EUR/USD: US dollar fell over inflation

The key event this week was Jerome Powell's speech and the main issue about the further monetary policy. The issues regarding inflation are of priority, which may greatly affect the US economy.

In the current situation, the dollar is experiencing strong volatility, which demonstrates itself in a sudden rise and momentary decline. On the other hand, experts consider the issues of inflation as a problem for the US currency, so they emphasize that we should get ready for any kind of trouble.

It clearly shows that the dollar is unstable throughout the speech of the Fed's chief as he discussed the changes in the current monetary policy. He ended his speech by announcing the end of curbing inflation and stressed out that the department will allow it to grow stronger in order to support the US labor market and the country's economy.

After that, the dollar slightly declined, abruptly slipping from the conquered peaks. However, it went back on top after a while. It also temporarily soared above 1.1900, so the market was surprised that it started growing since they expected it to enter a downturn. On Friday morning, the EUR/USD pair was already trading around 1.1871-1.1872, while the pair's attempts to climb higher were unsuccessful.

The regulator's decision means that the inflation rate will slightly exceed the target value of 2% in the near future. According to J. Powell, this step is a necessary measure, illustrating the official consent of the Fed to the policy of "targeting average inflation." The regulator's management is confident that a moderate excess of 2% inflation will benefit the economy.

As a result, raising interest rates in the event of a reduction in unemployment will be cancelled. It is possible that in such a situation, the Fed will wait for inflation to rise, although it previously held a different opinion. The department hopes that the updated approach will change the current state of affairs for the better.

In addition to changes related to inflation, the Fed has also adjusted its approach to employment. The US labor market has undergone a number of changes. Now, very low-income citizens who have been hit hardest by the COVID-19 and those who have lost their jobs in massive business closings, will be prioritized. According to J. Powell, the regulator does not plan to set a specific target for the unemployment rate, but is ready to trust the market. It is expected that the concept of "full employment" of the population will acquire a new meaning, dictated by new realities.

The result of the last meeting of the regulator, in addition to changing the basic concepts, was kind of revolutionary. For example, the term "2% inflation target" now sounds like "a key range with an average of 2%". At the same time, the regulator's management still considers the inflation rate of 2% as an ideal target in the long run. However, it requires a substantial waste of resources from the Fed and a balanced approach to raising rates. In case of incorrect calculations, a sharp decline in long-term inflation expectations is not excluded, which will entail a further decline in real inflation. Thus, experts sum up that the implementation of such a scenario can unsettle the economy for a long time.

Experts say that the current situation significantly shakes the position of the US currency. Now, there are inflationary problems on the way to the growth of the dollar, the solution of which is possible only in the long term. At the same time, there is no guarantee that the situation will be solved in favor of the dollar. Such questions are unpredictable and contain many surprises, which often appear in the process of solving economic problems.