As the Fed adopts average inflation targeting, we think interest rate hikes are very unlikely to happen in the near future and USD real rate will remain low and could even go (initially) lower if the Fed succeeds in generating higher domestic price pressures, Petr Krpata, an FX strategist at ING, reports.

"Fed Chair Jerome Powell formally announced yesterday the adoption of average inflation targeting."

"The adoption of average inflation targeting and tolerance for inflation to overshoot and make up for prior undershoots suggests (a) interest rate increases are a very distant proposition, and (b) USD real rate will remain low and should even go (initially) lower if the Fed succeeds in generating higher domestic price pressures."

"This points to a bearish USD outlook for many quarters to come (indeed, USD weakened across the board overnight). The scope for prolonged USD weakness and the non-tightening Fed should be also beneficial for emerging market currencies, particularly if it will take time for US inflation to start persistently overshooting the 2% target and the curve steepening will remain moderate as this would make local EM bonds attractive -unhedged -and keep inflows into EM markets in place."