The Fed is taking center stage amid the forex market after two major surprises at the end of last week. The unexpectedly strong jobs numbers reduced the likelihood of a near-term rate cut. But what’s captured headlines at the start of the week is the escalation in the feud between US President Donald Trump and Fed Chair Jerome Powell ahead of key data that could define market expectations on rates.

Over the weekend, Powell disclosed that he’d been subpoenaed by the U.S. Justice Department regarding statements he made in Congress in June, with the apparent aim of building a case against the Fed Chair. This has been widely interpreted as an attempt by the White House to put pressure on the central bank to cut rates. Trump has denied knowledge of the subpoena, but many see it as potentially eroding the Fed’s independence. The Chair of the Senate Banking Committee, which must approve the next Fed Chair when Powell’s term ends in May, said that consideration of nominations would be suspended until the legal matter is resolved.
 

Markets Proceed With Caution

The mood was risk-off across markets worldwide, driven by a combination of factors, including heightened geopolitical tensions. However, the prospect that the Fed will take a more hawkish trajectory in managing the world’s reserve currency will affect financial markets. There is speculation that a protracted legal battle against the Fed chair could delay the appointment of a replacement, keeping the FOMC hawkish for longer.

On top of that, the NFP figures substantiated the argument that the Fed should hold off on further rate cuts. The main argument for easing was growing slack in the jobs market. While the headline NFP number was slightly below expectations, prior hiring was also revised lower. At first glance, this appeared to suggest that the jobs market was weaker, and the dollar initially reacted negatively.
 

What Moved the Markets

The unemployment rate fell to 4.4% from 4.6% previously (4.5% was expected). Beyond the total number of jobs created, the Fed prioritizes achieving full employment and reducing wage-driven inflation. Strong wage growth, coupled with the unemployment rate returning to its structural level, implies the Fed doesn’t need to lower rates for now. Some analysts have suggested that rates have hit bottom, as a stronger US economy in 2026 returns the focus on inflation.
 

What to Look Out For

Attention now turns to Tuesday’s release of the December CPI, with the expectation that it will remain elevated. US headline inflation is expected to tick down to 2.6% from 2.7% previously. Excluding more volatile elements such as food and energy, the core rate is projected to stay unchanged at 2.6%.

Ahead of the data release, the odds of a March rate cut have fallen to 28% from 50% earlier in the week. If inflation remains at the same rate or increases, the market could shift to lower expectations for a rate cut. We should remember that the Fed’s dot-plot matrix implies only 25 bps of easing for 2026. Markets may hold out for further easing if inflation continues to decline.

More By This Author: