US federal prosecutors have started a criminal investigation into Federal Reserve Chair Jerome Powell. This inquiry looks into the renovation of the central bank’s headquarters in Washington and whether Powell gave false information to Congress about the project. The US Attorney’s Office for the District of Columbia is running the investigation, currently led by US Attorney Jeanine Pirro, a former prosecutor from New York.

Current Market Impact

The US Dollar Index (DXY) is now trading at about 98.90, down 0.23% for the day. The Federal Reserve plays a crucial role in US monetary policy, aiming for price stability and full employment. To achieve these goals, the Fed adjusts interest rates. If inflation goes above the Fed’s 2% target, raising interest rates makes the US appealing for international investors. On the other hand, when inflation or employment is low, the Fed lowers interest rates, which can weaken the US Dollar. The Fed holds eight policy meetings a year with the Federal Open Market Committee (FOMC), which includes twelve Fed officials. Sometimes, the Fed uses Quantitative Easing (QE) to improve credit flow by buying high-grade bonds, which can decrease the Dollar’s strength. Quantitative Tightening (QT) reverses this process, usually boosting the Dollar’s value. The investigation into the Federal Reserve Chair brings significant uncertainty to future monetary policy. This leadership issue could weaken the US Dollar as the Fed’s credibility is now under scrutiny. The Deutsche Bank Currency Volatility Index has increased to 8.2, a high not seen in months, suggesting that traders are preparing for volatility. This uncertainty may push the FOMC toward a more dovish approach, making it less likely to raise interest rates soon. Markets are quickly responding, with the chance of a rate cut at the March meeting now over 40%, up from just 15% last week. A cautious Fed tends to put downward pressure on the dollar.

Implications for Traders

For derivative traders, this means more volatility could make holding options better than outright positions. Strategies that benefit from large price changes, like long straddles on currency pairs such as EUR/USD, are becoming more appealing. While the exact direction of the next major move is uncertain, a big move is on the horizon. This situation is quite unusual. We remember how political conflicts over the debt ceiling in 2025 caused sharp, unpredictable fluctuations in the dollar. The political nature of this investigation adds complexity, suggesting a quick resolution is unlikely. Traders should brace for ongoing headline-driven market activity. With the US Dollar Index around 98.90, the most likely direction seems to be down until we gain more clarity. Any official announcements from the Fed or the US Attorney’s Office could significantly impact the market. Traders should hedge against potential downturns in the dollar, perhaps by purchasing put options on the currency. Create your live VT Markets account and start trading now.

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