Fed Independence at Risk (12 - 26 January)

Global markets faced a volatile week as institutional stability in the US was tested by a criminal investigation into Federal Reserve Chair Jerome Powell.

The dollar index slipped to 98.9 on Monday, ending a four-day rally, as Powell warned that DOJ subpoenas and potential indictments could undermine the central bank's ability to set rates independent of political influence. This domestic uncertainty, coupled with a December jobs report that missed expectations, has intensified the focus on the Fed’s path for 2026.

Precious metals reached unprecedented heights, with gold climbing above $4,570/oz and silver jumping to over $83/oz. These moves were accelerated by escalating geopolitical risks, specifically nationwide protests in Iran entering their third week with reports of hundreds of deaths, prompting military warnings from President Trump and counter-warnings from Tehran.

Market Drivers & Catalysts

• Fed Independence Crisis: A DOJ subpoena of the Fed and the opening of a criminal investigation on Chair Jerome Powell have put the central bank’s independence in question, pressuring the dollar.
• Iranian Geopolitical Risk: Protests in Iran, now in their third week with hundreds of fatalities, have led to US military options being weighed and Iranian warnings against US/Israeli intervention.
• Mixed Labor Market Signals: December Nonfarm payrolls grew by 50,000 (vs. 60,000 expected), while the unemployment rate fell to 4.4% (below forecasts), indicating a "low-hiring, low-firing" trend.
• Energy Supply Concerns: Brent crude hit $63.2/barrel following its largest two-day rally since October, driven by the threat of supply disruptions amid unrest in Iran.
• Yield Divergence: Sterling is benefiting from a yield advantage as markets price in at least two Fed cuts this year, compared to only one fully priced for the Bank of England.

Fixed Income

• United States 10‑Year Treasury: The yield rose to a four-month high of 4.2% before paring gains to 4.17%. Uncertainty remains regarding the magnitude of 2026 rate cuts after the mixed jobs report suggested the Fed may pause its easing momentum in January.
• United Kingdom 10‑Year Gilt: The yield fell sharply to around 4.40%, a drop of 13.5 bps, the most in a single week since October. This follows UK inflation slowing to 3.2% in November, below the BoE's predicted 3.4%, leading markets to price in an April rate cut.
• Japan 10‑Year Government Bond: The yield climbed to around 2.1% as investors price in further BOJ hikes. This move is supported by a 2.9% rise in household spending, though a 2.8% fall in real wages presents a hurdle for policymakers.
• Germany 10‑Year Bund: The yield held steady at 2.83% as of January 9. While the yield has fallen by 0.03 points over the last month, it remains 0.26 points higher than a year ago.

Commodities

Gold prices rose more than 1% to a record high above $4,570/oz. Safe-haven demand is surging due to the DOJ’s escalation against the Fed and warnings from Iran’s parliament speaker against US/Israeli intervention.

Silver jumped more than 4% to over $83/oz, hitting fresh record highs. The rally is supported by safe-haven demand tied to the Iranian protests and increasing bets on US interest rate cuts later this year.

Currencies

• U.S. Dollar Index (DXY): Slipped to 98.9, breaking its recent rally. The currency is under pressure from the Powell/DOJ investigation and December job growth (+50k) falling short of the 60k forecast.
• Euro: Depreciated to $1.163, its weakest since Dec 9. While the US labor market showed resilience with a 4.4% unemployment rate, easing inflation in the Eurozone has lowered expectations for ECB tightening.
• British Pound: Traded near $1.346, close to its $1.352 December high. Sterling is supported by the BoE’s cautious stance compared to the Fed, where markets expect at least two cuts this year.
• Japanese Yen: Weakened past 157/dollar on Friday, its fourth consecutive session of declines. Despite a 2.9% rise in household spending, a 2.8% decline in real wages remains a major drag on the currency.

Economic Data Highlights

• U.S. Nonfarm Payrolls & Unemployment: Payrolls rose by 50,000 in December; the unemployment rate fell to 4.4%. Employment trended up in food services, healthcare, and social assistance, while retail trade lost jobs.
• German CPI (Dec): Expected to be +1.8% YoY; consumer prices were unchanged (0.0%) MoM. The 2025 annual average inflation is expected to be +2.2%, with core inflation at +2.4%.
• Japan Household Spending (Nov): Rose unexpectedly by 2.9% due to winter-related purchases, though real wages fell 2.8% as inflation outpaced wage growth.
• U.K. Inflation (Nov): Slowed to 3.2% (vs. 3.6% in Oct), the lowest in eight months and below the Bank of England's 3.4% prediction.
• ADP Nonfarm Employment (Dec): Private-sector growth is expected to remain moderate, reflecting softer hiring momentum and easing labor-market tightness.

Macro Calendar Highlights

• U.S. Bureau of Labor Statistics News Release (December)
• Federal Statistical Office (Destatis) German Inflation Report
• U.S. Federal Reserve/DOJ Investigation Developments
• Bank of Japan Policy Outlook & Wage Data
• U.K. Gilt Market and BoE Rate Pricing