USD: Fed risk simmering, dollar holds solid
After yesterday’s flare‑up over Fed independence, further dollar downside remains contained as no immediate escalation followed. Opposition emerged from key Republican lawmakers who either explicitly vowed to block any Fed nominee, such as Tillis, or voiced concerns, such as Thune, about proceeding with Fed appointments while the legal battle continues. Markets interpreted this pushback as tempering the risk of rapid escalation. The dollar index in fact has kept its bullish structure intact, lifted from yesterday’s support at 98.700 and now trading back in the 99 zone.
What helped suppress further dollar weakness is, also, a firm Fed Chair Powell, who openly opposed bending to any political pressure on the interest rate front. This is pivotal because it keeps Trump’s ultimate intent of lower rates in the realm of threats, which markets have largely priced in. Later on, when May arrives and Trump’s appointee becomes the new Chair, the realisation of those threats appears more plausible as influence can be exerted more directly.
The event, while its impact has dissipated for now, may still be fresh enough in our view to influence the dollar’s reaction to today’s CPI report. A likely above-consensus print, following November’s shutdown-distorted softer reading, will meet a market that prices only a 5% chance of a January cut. Any pricing out therefore offers limited bullish impulse for the dollar. And after yesterday’s renewed concerns over Fed independence, we also see a risk that an above-consensus print could trigger further dollar downside. A data picture that contradicts a low-rate environment, coming so soon after fresh threats, is precisely the outcome markets want to avoid. A push lower in the dollar therefore appears warranted.
That said, we continue to favour mild upside risk today on the back of a hot CPI report, with resistance at 99.200 likely to be re‑tested.
Of course, let’s not forget the upcoming US Supreme Court ruling on the use of emergency powers to impose sweeping tariffs on trading partners. Market expectations lean toward those tariffs being ruled illegal. We expect the immediate FX reaction to be limited, as the broader consensus is that alternative mechanisms will be found to keep tariff revenues intact. That said, in the medium term, we cannot exclude the possibility of mild bearish pressure on the dollar tied to expectations of further uncertainty and erratic trade manoeuvres should the administration be forced to remove such tariffs, particularly at a time when USD sentiment is increasingly fragile amid concerns over Federal Reserve independence.
EUR: Dollar resilience caps euro ambition
The euro benefited from softer USD sentiment following yesterday’s events. Alongside safe‑haven demand for the Swiss franc, recent 2025 developments remind us that the euro tends to outperform when sentiment sours around US‑centric risks. The currently muted safe‑haven role of the Japanese yen further amplifies demand for the common currency.
That said, the bar has been set high throughout 2025 when it comes to threats to the Fed, and yesterday’s episode may struggle to move FX meaningfully from here. With no immediate escalation, EUR/USD failed to break resistance at $1.1695, and it’s now re-testing the 50-day moving average.
Euro moves remain overly dependent on the dollar. With a broadly neutral ECB outlook and stretched long positioning, as highlighted in yesterday’s piece, there is limited scope for the common currency to rally on its own merit.
Barring any escalation on the Powell–Trump fuse, we see last week’s lows at $1.1625 as the next key target for the pair this week.
GBP: Close to 10-year average
As we reported yesterday, GBP/USD has jumped in response to renewed worries over Fed independence. Sterling has become much more sensitive to USD weakness: a 1% fall in the US dollar index now lifts GBP/USD by almost 1%, up from 0.55% six months ago. The change in sensitivity to dollar dynamics has been greater than any other G10 currency over this period.
Hovering near $1.35, sterling sits close to its 10‑year average against the US dollar and has pushed back above all major daily and weekly moving averages, reinforcing the sense of a market that’s stabilising rather than capitulating.
It’s clear the dollar side of the equation is doing most of the heavy lifting. Domestically, UK data continue to paint a gloomy backdrop. Retail sales rose just 1% y/y on a like‑for‑like basis in December 2025 — the weakest pace in seven months as households reined in holiday spending under persistent cost pressures. While the figure beat expectations for a 0.6% gain, it was still well below the 3.1% increase recorded a year earlier.
Labour‑market signals were similarly soft. A survey from the Recruitment & Employment Confederation and KPMG showed employers scaled back hiring in December, with rising costs and weak sentiment following Labour’s November 26 tax‑raising budget weighing on recruitment activity.
Nevertheless, the pound is holding up surprisingly well against other major peers too, up 0.3% versus the euro this week and more than 1% against the yen. For GBP/EUR, however, the 200‑day moving average remains a key hurdle. A failure to break decisively above €1.1571 would reinforce a bearish double‑top pattern, opening the door to a re‑test of the €1.14 area in the very near term.
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Calendar: January 12-16
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
