The lower-than-expected US core Consumer Price Index (CPI) in December indicates a drop in inflation from tariffs. Still, issues from a government shutdown suggest the Federal Reserve (Fed) will keep interest rates steady in January. Labour data plays a more significant role than inflation in guiding policy decisions. A slight dip in the US dollar is expected in the first half of 2026 due to changes in Fed leadership and worries about its independence.

Cyclical Strength and US Dollar Rebound

Strong US data could help the US dollar recover if economic growth picks up before the mid-term elections. FXStreet reports this view based on insights from OCBC analysts Sim Moh Siong and Christopher Wong. FXStreet provides various financial insights but does not offer personalized investment advice or guarantee its accuracy. The site is for informational use only, urging readers to research thoroughly before making financial decisions. Remember, investing has risks, including the possible loss of your initial investment. In December 2025, the core CPI was lower than expected at 0.2%. This suggests that last year’s tariff-related price pressures may be reaching their limit. We expect the Federal Reserve to stay put during their meeting later this month. Currently, there’s over a 95% chance that rates will not change, impacted by the recent government shutdown. With the Fed’s outlook likely established for January, short-term interest rates may remain steady. This stability presents a chance to sell short-dated options on Fed Funds futures for profit. However, this calm may be misleading, as underlying political tensions increase.

Positioning for US Dollar Movements

We think the US dollar might show slight weakness in the coming months. Concerns about Fed leadership, especially with the Lisa Cook case’s oral arguments on January 21st, could pose risks. Consider buying puts on the Dollar Index (DXY) or calls on EUR/USD to prepare for this potential drop. Yet, we must not overlook the possibility of a dollar rebound, given the economy’s strength. For instance, Q4 2025 GDP surprised many with a solid 3.5% annualized growth rate, highlighting underlying cyclical robustness. Traders might use longer-dated call options to protect against a possible dollar surge leading into the mid-term elections. Political uncertainty is pushing investors towards safe havens, with Gold exceeding $4,630 per ounce and Silver reaching new all-time highs. This trend indicates that call options on precious metals ETFs could effectively diversify portfolios against dollar weakness and political risks. The next two weeks will be crucial, with significant events around January 21st and the FOMC meeting on the 27th and 28th. We anticipate an increase in implied volatility as these dates approach. Consider using short-term options straddles or strangles to capitalize on price movements without predicting a specific direction. Create your live VT Markets account and start trading now.

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