Every cloud has a silver lining. The lawsuit against the Fed chairman, accusing him of incompetence in overseeing the renovation of the central bank's building, became a black swan for the US dollar. Both the lawsuit itself and Jerome Powell's subsequent statement about political pressure and intimidation made a stronger impression on investors than the long-anticipated US employment report. EUR/USD managed to find a bottom and rebound from it—and how! The euro had not seen such a rapid one-day rally in more than a month.

Dynamics of bets on the US dollar against G10 currencies

The unexpected event turned everything upside down in the FX market. Prior to this, traders had been revising their views on the US dollar. A prolonged pause in the Fed's monetary easing cycle had turned it from an ugly duckling into a beautiful swan. Job growth of 50,000 and a decline in unemployment to 4.4% in December pushed expectations for a federal funds rate cut from March–April to June. Even if other central banks move toward keeping borrowing costs unchanged, a long pause in the cycle makes the greenback a favorite.

Donald Trump's impatience changes everything. The US president wants to fill the FOMC with his own people as quickly as possible in order to cut the federal funds rate to 1% or lower. At first glance, this looks unrealistic in an economy as strong as that of the United States. However, let us recall how aggressively a White House appointee on the Committee, Steve Miran, intends to slash borrowing costs. In his view, rates should fall by 150 basis points to 2.25% as early as 2026.

Dynamics and forecasts of central bank interest rates

If people like him make up half of the Committee, aggressive monetary easing will become a reality.

In my view, the story of the lawsuit against Jerome Powell is not worth a dime. First, the Fed chairman has stated that he does not intend to give in to pressure from the White House. Second, a highly influential Republican senator, Thom Tillis, has threatened not to vote for any candidate for the new Fed chair until the legal proceedings against the current one are concluded. As a result, neither Kevin Hassett nor Kevin Warsh—Donald Trump's main favorites—will be confirmed by Congress.

Finally, the Federal Reserve is not a one-man show. Decisions are made collectively. Even if the chair insists on rate cuts, the rest of the FOMC members will keep their heads. Against this backdrop, the EUR/USD's rally looks overly emotional.

From a technical standpoint, the daily chart of the main currency pair shows an attempt by the bulls to bring prices back into the fair value range of 1.169–1.180. Success in this effort would allow EUR/USD to extend its rally. Conversely, failure would provide grounds for opening or adding to previously established short positions in the euro against the US dollar.