Fed's AIT poses challenge for USD from cyclical perspective – TDS

Commenting on FOMC Chairman Jerome Powell's speech at the Jackson Hole Symposium, "the Committee seeks to achieve inflation that averages 2% over time," TD Securities analysts noted. "Therefore, following periods when inflation has been running persistently below 2%, appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time."

Additional takeaways

"That's the key new line on inflation in the new longer-run goals and strategy statement discussed by the chairman in his Jackson Hole talk. It, along with new wording on employment, makes for a more dovish reaction function, although a more dovish reaction function was already evident in actions and speeches."

"The chairman did not elaborate on what "moderately above 2%" means. We think it means up to 2.5%. Nor was there any new information on the tools and communications practices part of the review. However, with the strategy part wrapped up, the focus now turns to reflecting average inflation target (AIT) in forward guidance on the funds rate."

"The move to AIT is hardly a surprise but reinforces that the USD's real yield advantage has been lost. This poses a challenge for the USD from a cyclical perspective and gives more credence to chip away at the USD's longstanding overvaluation. Tactically, USD shorts are deeply entrenched, but that doesn't mean it is due for a reversal."