FOMC Preview: Fed on Hold as Political Risk Takes Center Stage

The upcoming FOMC meeting is unlikely to deliver a change in interest rates, but it carries elevated event risk due to growing political pressure on the Federal Reserve. With rates expected to remain on hold, attention is shifting toward Fed communication and the possibility that President Trump could nominate a new Fed Chair. This political overlay has meaningful implications for the US dollar, particularly with EUR/USD testing a major technical inflection point near 1.1920.

FOMC Expectations

Markets are highly confident that the Federal Reserve will leave policy unchanged at this meeting. Futures pricing implies near certainty that rates will remain within the current range, with expectations for no change extending into the March meeting.

As a result, the rate decision itself is unlikely to drive volatility. Instead, focus will turn to the policy statement and Chair Powell’s press conference, particularly any commentary on labour market conditions, inflation trends, and the balance of risks.

Political Risk and Fed Leadership

Political pressure on the Federal Reserve has intensified sharply. President Trump has escalated his criticism of Chair Powell and has indicated a desire to nominate a successor by the end of January. With policy effectively on hold, the timing creates an opportunity for the White House to influence expectations for future monetary policy without an immediate rate move.

A formal nomination would effectively turn Powell into a lame-duck chair ahead of his departure in May, encouraging markets to price forward-looking policy changes rather than current guidance.

The identity of any nominee matters for markets. Candidates perceived as more independent and neutral would likely reassure investors and support the dollar. By contrast, candidates viewed as aligned with Trump’s preference for lower interest rates could prompt expectations for easier policy later in the year, weighing on the US dollar and potentially supporting risk assets.

This political dimension introduces asymmetric risk into the meeting, even if the Fed itself remains unchanged.

Market Implications

With rates on hold and macro data still firm, near-term market direction is less about economic releases and more about credibility and independence at the central bank.

A nomination perceived as dovish would likely reinforce recent dollar weakness and steepen expectations for rate cuts later in the year. A more neutral or institutionally supportive choice could stabilize the dollar and trigger near-term mean reversion, particularly given stretched positioning in some FX pairs.

Volatility this week is therefore more likely to be driven by leadership headlines than by traditional monetary policy signals.

Technical Outlook: EUR/USD

EUR/USD is approaching a critical technical threshold near 1.1920, a level not seen in several years. The pair has rallied aggressively on broad-based dollar weakness, placing price at a clear decision point heading into the Fed meeting.

This level acts as a line in the sand. A dovish political signal or nomination could open the door toward the psychological 1.2000 handle. Conversely, reassurance around Fed independence or a neutral tone from Chair Powell could trigger a near-term pullback toward former resistance turned support around 1.1820.

Given the speed of the recent move, price reaction around this zone will be particularly informative.

Bottom Line

This FOMC meeting is unlikely to be about interest rates. Instead, markets are focused on messaging, credibility, and the future leadership of the Federal Reserve. Political developments around a potential Fed Chair nomination introduce meaningful event risk, particularly for the US dollar. With EUR/USD sitting at a major technical inflection point, the response to this meeting and any associated headlines could shape near-term FX direction more than the policy decision itself.