Markets are re-evaluating their bearish stance on the USD due to political opposition from Republican lawmakers against the Department of Justice’s investigation into Jerome Powell. This political pushback is easing the pressure on Powell, with some suggesting that if the investigation is dropped, it might strengthen the dollar by legitimising Powell’s potentially hawkish stance.
Current market sentiment has calmed, allowing a shift of focus back to data, with the December core CPI expected to be hotter at 0.4% MoM due to the November shutdown affecting data collection timing. This delay coincided with Thanksgiving discounts, which may have skewed November’s inflation reading lower. The more standard data collection in December might result in a hotter inflation reading.
Analysis of Economic Indicators
Despite recent hawkish repricing after job data and the Fed investigation influencing market decisions, any additional USD upside could be limited. However, there is potential for USD crosses to move closer to last Friday’s market closing levels. This outlook is influenced by a combination of economic data and political developments impacting the financial markets.
We are seeing markets dial back their bets against the US dollar as political pressure on the Federal Reserve seems to be easing. The pushback from lawmakers against the Department of Justice’s probe into Jerome Powell reduces the immediate risk of a politically driven dollar collapse. This suggests that implied volatility in currency options may decline in the coming weeks.
If the investigation is ultimately dropped, we believe it could paradoxically strengthen the dollar. Powell might feel a need to assert the Fed’s independence by adopting a more hawkish tone than the market currently expects. We saw a similar dynamic in late 2024 when strong Fed resolve against rate cut expectations fueled a significant dollar rally.
For now, attention is shifting back to economic data, especially this week’s core CPI figure for December 2025. There’s a notable risk of a hotter-than-expected 0.4% reading because of unusual data collection timing during the November 2025 shutdown. This could unwind the dovish pricing that followed the Fed investigation news.
Potential Impact of Inflation and Rate Decisions
Currently, fed funds futures are pricing in over a 60% probability of a rate cut by the March 2026 meeting. A strong inflation report would directly challenge this assumption, likely forcing a rapid repricing and pushing the US Dollar Index (DXY), now hovering near 103.50, back toward its recent highs. This makes short-term call options on the dollar an attractive strategy heading into the data release.
While last Friday’s strong jobs report already caused some hawkish repricing, the political noise has kept a lid on the dollar’s potential. This means there is still room for upside on a data surprise, especially with the VIX volatility index holding firm around 16. We should be positioned for a potential spike in the dollar that re-tests last week’s highs.
