The EUR/USD currency pair climbed over 150 pips to 1.1721 when news broke about US President Trump suggesting that Fed Chair Jerome Powell could be fired. Trump mentioned to House Republicans that the costly renovations at the Fed’s headquarters in Washington, D.C. could be a reason for Powell’s removal. This news triggered a sell-off of the US Dollar, pushing EUR/USD to a one-week high. Currently, EUR/USD is trading around 1.1650, downgrading slightly from its peak.

Speculation And Impact

In a meeting, Trump discussed the possibility of dismissing Powell, citing the high renovation costs. It’s unclear if Trump has the legal authority to remove Powell, but this speculation has impacted the US Dollar’s value. Trump later claimed he doesn’t plan to fire Powell immediately but hinted that certain conditions might lead to Powell’s exit. Following these comments, the US Dollar Index fell from 98.91 to 97.90. Trump has criticized Powell for maintaining “too high” interest rates, arguing they limit US growth. He’s called for aggressive rate cuts, raising worries about political pressure on the Fed’s decisions due to Trump’s comments about Powell’s resignation.

Currency Volatility And Strategies

We see the President’s remarks as an attack on the Federal Reserve’s independence. This adds a new level of political risk to the US Dollar that wasn’t there before. Such uncertainty signals that we should expect more price fluctuations. As a result, we anticipate significant currency volatility in the upcoming weeks. We expect the Cboe EuroCurrency Volatility Index, which has been stable around 5.5, to spike to the 7-8 range. This environment makes options pricing appealing for buyers looking to benefit from sharp price shifts. The market is already showing signs of this pressure on the monetary authority. According to the CME FedWatch Tool, traders are now estimating over a 90% chance of at least one rate cut by the year’s end. This suggests that the path ahead for the dollar is likely to be downward. Historically, political interference with the Federal Reserve has led to negative economic results. The pressure experienced by Chairman Arthur Burns in the 1970s serves as a cautionary tale, showing how such actions can cause policy errors and long-term currency decline. We are closely monitoring for similar trends to unfold in this current situation. However, we must also consider that Powell might choose to assert the Fed’s independence more strongly. A robust public statement affirming a data-driven approach could quickly reverse the trend and boost the dollar. This creates a two-sided trading opportunity rather than a one-way bet. Given the uncertain direction but anticipated price swings, we believe strategies such as long straddles or strangles on EUR/USD options are suitable. This enables traders to profit from large price movements in either direction, leveraging the current instability. It is a direct response to rising political tensions. Create your live VT Markets account and start trading now.

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