The EUR/USD rose over 150 pips to 1.1721 as news emerged about US President Trump suggesting the removal of Fed Chair Jerome Powell. Trump questioned House Republicans about firing Powell due to high renovation costs of the Fed’s Washington, D.C. headquarters.
This news led to a sell-off in the US Dollar, causing EUR/USD to hit a one-week high. At present, EUR/USD trades around 1.1650, having pulled back slightly after reaching a peak of 1.1721.
Speculation And Impact
During a meeting, Trump raised the topic of dismissing Powell, citing the expensive renovation as a possible reason. It remains uncertain if the President can legally remove Powell, but the speculation affected the US Dollar’s value.
Later, Trump denied immediate plans to fire Powell while leaving the possibility open, stating certain conditions might warrant Powell’s departure. The US Dollar Index fell from 98.91 to 97.90 following these developments.
Trump has critiqued Powell for keeping interest rates “too high,” claiming they hinder US growth. He has pressured for a more aggressive rate reduction, raising concerns about political influence on the Fed’s policy decisions due to Trump’s direct calls for Powell’s resignation.
Currency Volatility And Strategies
We view the comments from the President as a direct challenge to the central bank’s independence. This introduces a political risk premium into the US Dollar that was not previously priced in. Such uncertainty is a critical signal for us to anticipate more erratic price action.
Consequently, we expect a significant increase in currency volatility in the coming weeks. We are looking for the Cboe EuroCurrency Volatility Index, which has been hovering in a low range around 5.5, to potentially spike towards the 7-8 level. This makes options pricing more attractive for buyers who can profit from sharp movements.
The market is already reflecting this pressure on the monetary authority. Data from the CME FedWatch Tool shows traders are now pricing in a greater than 90% probability of at least one rate cut by the end of the year. This sentiment suggests that the path of least resistance for the dollar is downward.
Historically, political interference with the Federal Reserve has led to poor economic outcomes. The pressure exerted on Chairman Arthur Burns in the 1970s is a stark reminder that such actions can lead to policy mistakes and long-term currency debasement. We are watching for similar patterns to emerge from this conflict.
However, we must also consider the possibility that the current chairman will assert his institution’s independence more forcefully. Any strong public statement reinforcing a data-dependent approach, rather than a politically-motivated one, could cause a sharp reversal and strengthen the dollar. This creates a two-sided trading opportunity, not a one-way bet.
Given the uncertain direction but expected increase in price swings, we believe strategies like long straddles or strangles on EUR/USD options are appropriate. This allows a trader to profit from a large price move in either direction, capitalizing on the instability itself. It is a direct play on the rising political tensions.
