Markets are reassessing their negative view of the USD due to political pushback from Republican lawmakers against the Department of Justice’s investigation into Jerome Powell. This response is relieving some pressure on Powell. If the investigation is dropped, it could boost the dollar as it would support Powell’s potentially more aggressive strategy. Current market feelings have settled, allowing a renewed focus on economic data. The December core CPI is expected to rise to 0.4% MoM. This increase could be because the November shutdown disrupted data collection, coinciding with Thanksgiving discounts that might have made November’s inflation appear lower. A more typical data collection for December could lead to a higher inflation reading.

Analysis of Economic Indicators

Despite recent adjustments to a more hawkish stance following job data and the Fed investigation affecting market actions, further gains for the USD may be limited. However, USD pairs could return to levels seen last Friday. This outlook depends on economic data and political changes influencing the financial markets. Markets are reducing their bets against the US dollar as political pressure on the Federal Reserve appears to be easing. Lawmakers’ resistance to the Department of Justice’s investigation into Jerome Powell decreases the risk of a politically motivated dollar decline. Consequently, this suggests that implied volatility in currency options might decrease in the coming weeks. If the investigation is dropped, it could paradoxically strengthen the dollar. Powell may feel compelled to emphasize the Fed’s independence by taking a more hawkish approach than what the market currently anticipates. We saw a similar situation in late 2024 when strong Fed resistance against expectations of rate cuts led to a substantial dollar increase. For now, the focus is turning back to economic data, particularly the upcoming core CPI report for December 2025. There is a significant risk of a higher-than-expected 0.4% reading due to irregular data collection during the November 2025 shutdown. This could reverse the dovish trends that followed the Fed investigation news.

Potential Impact of Inflation and Rate Decisions

Currently, fed funds futures are predicting over a 60% chance of a rate cut by the March 2026 meeting. A strong inflation report would challenge this prediction, likely leading to swift adjustments and pushing the US Dollar Index (DXY), currently around 103.50, back toward its recent highs. This indicates that short-term call options on the dollar could be a smart strategy as we approach the data release. While last Friday’s robust jobs report has already caused some positive adjustments, political concerns have limited the dollar’s potential. This suggests there is still room for an upside surprise on the data, especially with the VIX volatility index stable around 16. We should prepare for a potential rise in the dollar that tests last week’s highs. Create your live VT Markets account and start trading now.

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