USD: Markets scale back bearish positions on the dollar as Fed policy is scrutinized – ING

Shifting Market Sentiment on the Dollar Amid Fed Investigation Developments

Recent developments have prompted investors to reconsider their previously bearish outlook on the US dollar, which was influenced by concerns over the Federal Reserve's independence. This shift comes after several Republican lawmakers voiced strong opposition to the Department of Justice's investigation into Jerome Powell. Notably, Senator Thom Tillis declared he would block any future nominations for Fed Chair until the issue is resolved. Additionally, Treasury Secretary Scott Bessent reportedly warned former President Trump about the potential impact of the probe on financial markets, according to ING FX analyst Francesco Pesole.

Republican Resistance Reduces Pressure on Powell

Market participants are now looking for clear signals—ideally from Trump or the Department of Justice—to restore confidence. The immediate risk of a sharp decline in the dollar appears to have diminished. Should the investigation be called off, the dollar could actually benefit, as Powell might be seen as having a stronger mandate to pursue a hawkish policy stance, reinforcing his credibility.

With tensions easing, attention is turning back to economic data. Analysts expect the dollar could gain if December’s core CPI rises by 0.4% month-over-month, which would surpass the consensus forecast of 0.3%. Due to the government shutdown, much of the data for November 2025 was collected later in the month, a period typically marked by Thanksgiving discounts. This likely resulted in a lower inflation figure for November 2024. Returning to a more typical data collection schedule in December increases the likelihood of a higher inflation reading.

Some of the market’s hawkish adjustment already took place last Friday following the release of employment figures. The probability of a rate cut also rose in response to news about the Fed investigation. While this limits the potential for significant dollar gains, it could still allow USD pairs to gradually move back toward levels seen at the end of last week.