- AUD/USD gathers bullish momentum in the American session on Friday.
- Fed Chair Powell acknowledged increasing downside risks to the labor market.
- The US Dollar comes under strong selling pressure heading into the weekend.
Following the bearish action seen throughout this week, AUD/USD reversed its direction and climbed toward 0.6500 in the American session on Friday, erasing a portion of its weekly losses in the process.
Fed Chair Powell triggers USD selloff
While speaking at the annual Jackson Hole Symposium on Friday, Federal Reserve (Fed) Chair Jerome Powell announced that they will adopt a new policy framework of flexible inflation targeting and eliminate the ‘makeup’ strategy for inflation.
Additionally, Powell said that downside risks to the labor market were rising, while noting that it would be reasonable to expect that the inflation effects of tariffs would be short-lived.
Breaking: Jerome Powell says downside risks to labor market rising
The US Dollar (USD) came under heavy selling pressure following these comments. At the time of press, the USD Index was down 0.7% on the day at 97.90.
After closing the first four days of the week in negative territory, AUD/USD now remains on track to post strong gains on Friday.
Meanwhile, the improving market mood seems to be putting additional weight on the USD’s shoulders. Boosted by dovish Powell comments, Wall Street’s main indexes rise between 1.5% and 1.8% on the day.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
