The Pound Sterling has strengthened against the US Dollar, reaching approximately 1.3465, particularly after the US Department of Justice initiated a criminal investigation into Federal Reserve Chair Jerome Powell for alleged mismanagement of funds. This development has led to a drop in the US Dollar Index, which now stands 0.3% lower at 98.80.
The investigation involves Powell’s conduct and statements made during a Senate testimony in June 2025. The situation has intensified tensions between Powell and US President Donald Trump, potentially compromising the Federal Reserve’s autonomy, which is negative for the USD.
Technical Indicators And Economic Data
Currently, the GBP/USD pair is benefiting from bouncing off near the 50% Fibonacci retracement level around 1.3500. The 20-day EMA supporting this price action indicates a bullish outlook.
Attention is turning to upcoming economic data releases, including UK employment figures and US inflation data. The UK employment data could influence the Bank of England’s policy approach, while the US CPI figures could affect the interest rate outlook.
In December, US employment data showed a decline in the unemployment rate to 4.4%, though hiring figures fell short of expectations at 50,000 jobs against an estimate of 60,000. These indicators will be scrutinised for clues about monetary policy directions.
The investigation into the Federal Reserve’s leadership is a major shock to the system, challenging the core principle of central bank independence. We see this as the main driver of market action for the coming weeks. Traders should therefore anticipate elevated volatility, as political headlines could easily overshadow economic data.
Market Volatility And Risk Assessment
The US Dollar has weakened significantly in response, with the DXY falling sharply from its monthly high. This is not a typical market move, but a direct reaction to a perceived increase in US political risk. We should view any short-term dollar strength with skepticism until there is more clarity on the Fed’s situation.
In the derivatives market, we have already seen a spike in implied volatility for currency pairs involving the dollar. One-month implied volatility on EUR/USD options, for example, has jumped to over 9.5%, a significant increase from the 6% average we saw throughout late 2025. This indicates that options traders are pricing in much larger price swings and are actively buying protection against sudden moves.
The US inflation data due tomorrow is now a critical event, but its impact is uncertain. Normally, a high inflation reading would strengthen the case for a hawkish Fed, boosting the dollar. However, with the Fed’s credibility under fire, we might see a muted or even negative reaction from the dollar, as the market questions their ability to act freely.
The Pound Sterling, meanwhile, benefits from this dollar weakness, and strong UK employment data tomorrow could add more fuel to the fire. We should be watching the technical level of 1.3496 in the GBP/USD pair closely. A decisive break above this Fibonacci resistance level could trigger a rapid move higher, and options strategies could be structured to capitalize on such a breakout.
