USD: CPI asymmetry after political pushback

Yesterday’s flare-up around Fed independence has not extended, and further dollar downside has so far been contained. Opposition from senior Republican lawmakers has been a key circuit-breaker, with some signalling they would resist moving forward on Fed nominations while the legal dispute continues. Markets have taken that pushback as a constraint on near-term escalation risk.

Price action reflects the calmer tone. The dollar index has held its broader constructive structure, rebounding from support near 98.70 and returning to the 99 handle. Powell’s insistence on resisting political pressure reinforces the view that aggressive rate-cut demands remain more rhetoric than reality for now, even if the risk feels more credible later in the year when leadership changes could increase political leverage.

Even so, the episode may still shape the market’s response to today’s CPI. We look for a firmer core print (0.4% m/m versus 0.3% consensus), but the scope for meaningful hawkish repricing is limited with markets assigning only a small chance of a January cut. That leaves an awkward asymmetry: higher inflation can still support the dollar at the margin, but it may also revive concerns about policy credibility and trigger renewed USD selling if investors decide the US risk premium is rising.

GBP: Sterling is trading as a USD proxy

Sterling’s rally has been driven mainly by the USD leg. GBP/USD has become markedly more sensitive to broad dollar moves in recent months, leaving cable increasingly exposed to US politics and US data rather than domestic catalysts. Near $1.35, the pair sits around its long-run average and has moved back above key moving averages, consistent with stabilisation.

The domestic picture remains soft. Retail sales growth slowed to roughly 1% y/y in December, and survey evidence points to weaker hiring as higher costs and a more cautious post-Budget backdrop weigh on activity. That macro tone has not stopped sterling from holding up, but it does limit the scope for sustained outperformance if the USD tailwind fades.

Against the euro, GBP/EUR still faces a meaningful technical hurdle near the 200-day moving average around €1.1571. A failure to clear it cleanly would keep a reversal risk in play, with scope to gravitate back towards the €1.14 area. Thursday’s UK GDP is the first clear domestic test of the year and could support the pound if it surprises higher, though the near-term driver remains the USD impulse.

EUR: Upside still needs a weaker dollar

The euro has benefited from softer USD sentiment and the tendency for EUR to perform better when US-centric risks dominate. With the yen’s safe-haven role muted, that has also reinforced demand for the common currency as an alternative defensive allocation, helping EUR/USD stay supported.

However, follow-through has been limited. EUR/USD struggled to break above resistance around $1.1695 and has drifted back towards key trend levels, underlining how dependent the pair remains on the dollar side. With the ECB outlook broadly steady and positioning already extended, the euro has limited ability to rally on its own.

If the Fed independence story stays contained, last week’s lows around $1.1625 look like the next practical reference point this week. A firmer CPI would usually challenge that area via rates, but the bigger question is whether the market treats higher inflation as supportive through yields, or negative through an increased political and credibility risk premium.

Looking ahead

• US CPI (today): limited USD upside from repricing, but a larger downside tail if credibility concerns re-emerge.

• Fed independence headlines: any fresh signals from the White House, DoJ or lawmakers could quickly reset the risk premium.

• Supreme Court tariff ruling: consensus leans towards constraints on emergency powers; near-term FX impact may be muted, but uncertainty remains a medium-term USD drag.

• UK GDP (Thursday): first domestic catalyst for sterling this year.

• Japan politics and USD/JPY: election speculation has pushed JPY weaker, keeping 160 and intervention risk in focus.