Political Winds Shift USD Sentiment as Markets Recalibrate Fed Independence Narrative

The dollar’s recent weakness has found new support as Republican opposition to the Department of Justice investigation targeting Jerome Powell gains momentum. Market participants are now reassessing their downside positioning on the greenback following vocal pushback from GOP lawmakers, including Senator Thom Tillis’s pledge to oppose future Fed Chair nominees until the probe concludes.

Markets Reading the Room Differently

Treasury Secretary Scott Bessent’s reported intervention with Trump regarding financial stability concerns has seemingly altered the calculus for traders betting against the dollar. According to FX analysis, this political intervention creates a crucial turning point—if authorities ultimately abandon the investigation, Powell’s credibility could emerge strengthened, potentially supporting more aggressive monetary policy from the Fed.

The narrative now hinges on perception. Should the DoJ’s investigation be dropped, markets may interpret this as validating Powell’s position and resolve, lending him additional political cover to maintain hawkish tones. This shift matters because it changes the risk-reward for USD short positions that had accumulated during peak uncertainty.

Data Takes Center Stage Again

With political nerves settling, focus is returning to economic fundamentals. The upcoming December core CPI reading carries particular significance—consensus anticipates a 0.3% month-on-month print, but analysis suggests the actual figure could prove hotter than expected, potentially reaching 0.4%.

The December collection timing deserves attention here. Because November’s government shutdown compressed the data-gathering window into later weeks when Thanksgiving promotional activity typically peaks, that month’s inflation was likely suppressed artificially. December’s return to standard collection protocols means inflation readings could reverse higher by comparison.

The Dollar’s Path Forward

Last Friday’s jobs report already sparked hawkish repricing across markets, and subsequent moves driven by the Fed independence story have already priced in significant cut probability assumptions. This suggests the dollar’s upside potential, while present, faces limits—but USD crosses could reasonably edge back toward last Friday’s closing levels if inflation data delivers the anticipated surprise.

The consensus view: political resolution combined with potential inflation resilience could provide the dollar modest tailwinds in the sessions ahead.