The Pound Sterling has gained strength against the US Dollar, reaching about 1.3465. This increase follows the US Department of Justice starting a criminal investigation into Federal Reserve Chair Jerome Powell for alleged mishandling of funds. As a result, the US Dollar Index has fallen by 0.3%, now at 98.80. The investigation focuses on Powell’s behavior and statements made during his Senate testimony in June 2025. This has heightened tensions between Powell and US President Donald Trump, which could jeopardize the independence of the Federal Reserve—a negative sign for the USD.

Technical Indicators And Economic Data

The GBP/USD pair is currently bouncing off the 50% Fibonacci retracement level near 1.3500. The support from the 20-day EMA suggests a positive outlook. Attention is shifting to upcoming economic reports, including employment figures from the UK and inflation data from the US. The UK’s employment numbers may influence the Bank of England’s policy, while the US CPI figures could impact interest rate expectations. In December, US employment data showed a drop in the unemployment rate to 4.4%, but hiring fell short, with only 50,000 jobs added compared to an anticipated 60,000. Traders will closely examine these indicators for clues about future monetary policy. The investigation into the Federal Reserve’s leadership poses a significant challenge, threatening the principle of central bank independence. This is likely to drive market activity in the coming weeks, leading to higher volatility as political news may overshadow economic data.

Market Volatility And Risk Assessment

As a result, the US Dollar has weakened, with the DXY dropping sharply from its monthly high. This is an atypical market reaction, reflecting increased perceived political risk in the US. Be cautious of any short-term strength in the dollar until the situation with the Fed becomes clearer. In the derivatives market, we’ve already noticed a rise in implied volatility for dollar-related currency pairs. For instance, the one-month implied volatility on EUR/USD options has surged to over 9.5%, up from a 6% average in late 2025. This indicates that options traders expect larger price movements and are actively hedging against sudden changes. The upcoming US inflation data, due tomorrow, is a crucial event, though its impact is uncertain. Typically, high inflation would support a hawkish Fed stance, boosting the dollar. However, given the Fed’s credibility is under scrutiny, we might see a muted or negative response from the dollar as the market doubts their ability to act independently. Meanwhile, the Pound Sterling benefits from the US dollar’s weakness. Strong UK employment data tomorrow could further strengthen the pound. It’s important to monitor the technical level of 1.3496 in the GBP/USD pair. A clear break above this Fibonacci resistance could lead to a quick rise, and traders might explore options strategies to profit from such a breakout. Create your live VT Markets account and start trading now.

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