The dollar had made gains against both the euro and sterling in the first week of 2026, but news of a Justice Department inquiry into US Federal Reserve (Fed) chairman Jerome Powell has sent shockwaves through money markets
The dollar started 2026 strongly as a resilient US labour market dampened expectations of an imminent interest rate cut. While the US economy added fewer jobs than expected in December, unemployment fell, making a January cut less likely. Higher rates make currencies more attractive to investors, adding to the dollar’s appeal. The greenback hit its strongest position against the euro since early December last week and also strengthened slightly against the pound.
But the news on Monday of an investigation into Fed Chairman Jerome Powell has reversed those gains. Investors are selling the dollar, fearing political interference in the Fed’s activity.
When will we see rate cuts?
While the chances of movement in January have reduced, most investors are still expecting at least two interest rate cuts by the Fed in 2026, with some chance of a third. The effective rate is currently around 3.64%, well above the EU’s 2.15%. The timing of the next cut is open to question, though many investors now believe it is unlikely to happen before the spring.
Currently, any eurozone rate cut is not expected in 2026, especially after new figures showed headline inflation falling to 2%, meeting the European Central Bank’s (ECB) target. The UK interest rate now sits at 3.75% after a Bank of England (BoE) cut in December, with at least one further reduction now priced in for 2026.
The week ahead:
All eyes will be growing geo-political tensions around the fate of Greenland as well as on the fallout from the Justice Department investigation into Chairman Powell, which is likely to cause volatility in the markets. In addition, the US will release inflation data this week (Tuesday), which may give clues as to the likely timing of the Fed’s next rate cutting move. Investors will also be looking at US retail sales figures (Wednesday) for evidence about the underlying strength of the economy.
In Europe, eyes will be on GDP figures in Germany and the UK, and balance of trade and industrial production data from the eurozone (all Thursday).
