The softer-than-expected US core Consumer Price Index (CPI) in December suggests a decrease in tariff-related inflation pressures. However, distortions from a government shutdown leave expectations that the Federal Reserve (Fed) will maintain interest rates in January.
Labour data is more influential than inflation for making policy decisions. A slight weakness in the US dollar is anticipated in the first half of 2026 due to leadership changes at the Fed and concerns over its independence.
Cyclical Strength and US Dollar Rebound
Cyclical strength in US data could support a rebound in the US dollar if growth accelerates before the mid-term elections. The market observation was noted by FXStreet, consisting of inputs from OCBC’s analysts, Sim Moh Siong and Christopher Wong.
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The recent December 2025 core CPI reading came in softer than expected at 0.2%, suggesting that last year’s tariff-related price pressures might be peaking. Despite this, we see the Federal Reserve remaining on hold at their meeting later this month. The market is currently pricing in a greater than 95% probability of no change, given data distortions from the recent government shutdown.
With the Fed’s path seemingly set for January, short-term interest rate volatility is likely to be muted. This presents an opportunity to sell short-dated options on Fed Funds futures to collect premium. However, this stability could be deceptive, as underlying political tensions are building.
Positioning for US Dollar Movements
We believe the US dollar is positioned for modest weakness in the coming months. Concerns over Federal Reserve leadership and independence, especially with the Lisa Cook case oral arguments on January 21st, are creating a dovish risk. Consider buying puts on the Dollar Index (DXY) or calls on EUR/USD to position for this potential decline.
However, the risk of a dollar rebound cannot be ignored, especially as the economy has shown resilience. Looking back, Q4 2025 GDP data surprised with a strong 3.5% annualized growth rate, reminding us of the underlying cyclical strength. Traders could use longer-dated call options to hedge against a potential dollar rally ahead of the mid-term elections.
The political uncertainty is clearly driving capital into safe havens, as seen with Gold pushing past $4,630 an ounce. This flight to safety is also reflected in Silver hitting new all-time highs. This suggests that call options on precious metals ETFs could serve as a valuable portfolio diversifier against dollar weakness and political risks.
The next two weeks are critical, with key event risk clustered around January 21st and the FOMC meeting on the 27th and 28th. We expect implied volatility to rise heading into these dates. Look to short-term options straddles or strangles to trade the price swings without picking a specific direction.
