Trump plans to remove Fed governor Cook, which initially caused the USD to drop. Cook responded by saying that Trump can’t dismiss her, allowing the dollar to recover. Trump may face legal challenges as he tries to incapacitate Cook through the courts. If this doesn’t work, he might take the issue to the Supreme Court, complicating matters further.

Impact On Markets

The markets recognize Trump’s challenge to the Fed’s independence, even though he can’t currently change the central bank. This ongoing tension is affecting the bond market and raises concerns about the dollar’s strength in the medium term. Trump’s vocal stance could influence the market as Powell’s term as Fed chair ends next May. This situation is still developing and could impact financial markets. After yesterday’s events, the market may have calmed, but this is a clear warning sign. One-month implied volatility on major dollar pairs like EUR/USD surged to over 8.5% before settling, rising significantly from last week’s levels below 6%. This suggests we should brace for more abrupt price shifts.

Pressure On The Fed

This directly challenges the Fed’s independence, impacting interest rate markets. The chance of a rate hike at the next FOMC meeting, based on Fed Funds futures, has decreased from 40% to just under 25%. The Fed is likely to avoid tightening policy amid such political scrutiny. We’ve seen this pressure before, especially during 2018-2019 when presidential criticism caused sharp, unpredictable dollar movements. History indicates that this political noise will grow louder, leading to more headline-driven volatility in the coming weeks. In response, buying volatility on the dollar seems wise. Options like straddles or strangles can profit from significant moves in either direction, which is helpful when political outcomes are uncertain. Holding some downside protection on the dollar, like puts on the DXY index, is also a smart hedge. Looking ahead, the real contest will be over Fed Chair Powell’s replacement, as his term ends in May 2026. This conflict is just a preview of the larger fight for monetary policy control. We should approach any dollar rallies with skepticism, as political challenges are mounting. Create your live VT Markets account and start trading now.

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