US Dollar Steadies As Inflation Cools And Powell Investigation Fades

The US dollar remained under pressure against the euro and pound sterling, but steadied as markets absorbed the Powell investigation fallout and US inflation cooled slightly in December.

Markets steadied on Tuesday after a turbulent start to the week triggered by news that Federal Reserve Chair Jerome Powell is under criminal investigation, while US inflation data came in broadly in line with expectations and failed to move markets materially.

Powell Investigation Shock Quickly Fades

This week’s market action has been heavily US-focused.

On Monday, attention centred on reports that Powell is under criminal investigation for alleged perjury, a development that initially rattled confidence in the independence of the Federal Reserve. The reaction was swift, with the US dollar, bonds and equities all selling off sharply in early trading.

However, the unease did not last long. The pressure eased as senior Republican figures publicly questioned the investigation and warned about its implications for financial markets and institutional credibility.

As ING noted:

“Markets have started to rethink some of their USD-bearish Fed independence bets, following several pushbacks against the Department of Justice’s probe into Jerome Powell from Republican lawmakers. Senator Thom Tillis went as far as saying he’ll oppose the next Chair nominee until the matter is resolved, while Treasury Secretary Scott Bessent reportedly flagged the financial market implications of the investigation to Trump.”

Support for Powell also came from overseas. On Tuesday, the European Central Bank and other major central banks issued a rare show of solidarity, emphasising the importance of central bank independence for financial stability.

“The ECB and other European and international central banks stand in full solidarity with the Federal Reserve System and its Chair Jerome H. Powell. The independence of central banks is in the interest of the people we serve.”

By the end of Monday’s session, most of the initial moves had reversed. US equities recovered to make fresh highs, while bond markets clawed back early losses. The US dollar remained on the softer side, although that weakness was consistent with a broader trend extending from late 2025.

US CPI Offers Little New Direction

Attention quickly shifted to Tuesday’s US inflation release.

The Bureau of Labor Statistics reported that headline Consumer Price Index inflation rose 2.7% year on year in December, unchanged from the previous month. On a monthly basis, CPI increased by 0.3%, in line with consensus expectations.

Core CPI, which strips out food and energy prices, showed a modest cooling. It rose 0.2% on the month, slightly below the 0.3% many economists had forecast, while the annual rate held steady at 2.6%, matching a four-year low.

Shelter and food costs remained the main drivers of price pressures, rising 0.4% and 0.7% respectively during the month. Energy prices helped offset some of the increase, with gasoline prices falling sharply on an annual basis.

Markets reacted calmly. US stock indices were little changed following the release, and Treasury yields remained steady. The data reinforced expectations that the Federal Reserve will keep interest rates unchanged at its January 27–28 meeting, with futures markets pricing an overwhelming probability of a hold.

Tariffs Back in Focus

With inflation largely priced in, market attention may soon turn back to politics. Investors are watching closely for a long-awaited Supreme Court ruling on the legality of US tariffs, which was expected last week but has yet to be released.

A ruling against the tariffs is generally seen as positive for markets, although it could trigger short-term volatility and political uncertainty. President Trump has already warned that such a decision would be highly disruptive, adding another layer of risk to an already eventful start to the year.