Markets reacted strongly to the Department of Justice's lawsuit against the Fed chairman. However, they gradually calmed down. President Donald Trump's haste may backfire on him. Let's discuss this topic and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The US government may face an uphill battle in its conflict with the Fed.
- The Fed plans to keep interest rates low for an extended period.
- Inflation data is unlikely to significantly sway markets.
- Short positions on the EUR/USD pair formed at 1.169 can be kept open.
Weekly US Dollar Fundamental Forecast
The US administration and the Department of Justice sought to compel Jerome Powell to step down not only as chairman but also as FOMC governor. However, the opposite may occur. Ready to fight for the Fed's independence to the end, Powell will remain on the Committee after May, depriving Donald Trump of the opportunity to get another seat for his people. The president is eager to lower rates as quickly as possible, but in fact, they may rise.
According to asset managers at PIMCO, PGIM, and DWS Group, the criminal charges against Jerome Powell may destabilize the US debt market. Investors will demand higher risk premiums and keep Treasury yields high, making mortgages and other loans more expensive and slowing the US economy.
US Debt Market's Response to Threats to Fed's Independence
Source: Bloomberg.
Donald Trump wants to appoint someone to the Fed chair position who will significantly ease monetary policy. However, he may not receive the Senate's support. A number of Republicans have said they would not vote for the president's candidate until the lawsuit against Jerome Powell is resolved. They control the upper house of Congress by a 53-47 margin over the Democrats. So, it only takes a few people to block any candidate.
Meanwhile, the EUR/USD pair showed high volatility in response to the lawsuit against Jerome Powell, but gradually did what it had to do — take a step back. Investors returned to the TACO trade, or “Trump Always Chickens Out.” Moreover, the Fed's stance is unlikely to change significantly in the coming months. The Fed chairman is now more likely to vote to keep rates unchanged than to cut them. New York Fed President John Williams said that monetary policy was well-positioned. He used this phrase in 2025, when the central bank kept borrowing costs unchanged for eight months.
The storm has passed, and the markets are returning their focus to a pause in the Fed's monetary expansion cycle, which, due to still extremely high interest rates, gives the US dollar an undeniable advantage.
US Inflation Change
Source: Bloomberg.
Will US inflation data for December change anything? Only if indicators show rapid growth, which would be an additional advantage for the greenback. Otherwise, with the sluggish disinflationary process, everything will fit into the Fed's plans to keep rates high for a long time. Bloomberg analysts expect core CPI to accelerate from 2.6% to 2.7%.
Weekly EURUSD Trading Plan
The theatrical performance staged by the US administration does not change the overall picture. The US dollar has gained strength amid the Fed's pause. Therefore, short positions on the EUR/USD pair formed at 1.1795 and 1.175 and increased at 1.169 can be maintained.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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