Inauguration and first measures. Impact on global financial conditions and liquidity flows.
A week marked by rare institutional volatility. The Dollar was shaken by unprecedented political attacks on the Fed's independence, while Japan sinks into a political crisis. Despite this noise, equity markets (S&P 500) and commodities ignore the fear, boosted by a massive injection of liquidity (+$1,000 Bn) and geopolitical tensions with Iran.
1. USD: The Fed Under Attack
The standout event of the week is not economic, but political. The Dollar’s rally was brutally interrupted when the Department of Justice (DOJ) accused Jerome Powell and the Fed of lying about the renovations of the central bank’s premises.
The Macro impact: Powell interprets this maneuver as a direct attack by the Trump administration against the Fed’s independence. This climate of distrust initially weighed on the greenback. Fortunately for the Dollar, the Supreme Court does not appear favorable to Trump’s aggressive tariffs, which limits the risk of structural depreciation.
Technical note: The market ended up digesting the news (“Buy the news”), refocusing at the end of the week on inflation data (CPI) and retail sales, which validate the resilience of the US economy.
2. Euro Area & Switzerland: The CHF as a Safe Haven
In this context of US institutional crisis, the Euro failed to take advantage, sorely lacking catalysts (“empty narrative”).
It is the Swiss Franc (CHF) that comes out ahead, perfectly playing its role of “good soldier” to guard against US cyclical and political risk. The EUR/USD pair, for its part, remains vulnerable and could revisit 1.1600.
3. Japan: Political Crisis = Bullish USD/JPY
Japan is going through a major zone of turbulence. The Prime Minister expressed his wish to dissolve parliament, plunging the country into uncertainty.
Immediate consequence: This political instability triggered massive buying flows on the USD/JPY pair. The market punishes Japanese uncertainty against a Dollar that, despite its troubles, offers yield.
4. United Kingdom: Solid Fundamentals
Unlike Europe, the United Kingdom displays surprising health. The week’s data are positive:
- Monthly GDP rising (+0.3%).
- Industrial production above expectations.
- Real estate market regaining optimism.
Despite persistent political uncertainty and BoE speeches, these fundamentals could support the Pound Sterling. If UK CPI surprises to the upside next week, the current correction will be a buying opportunity.
5. Equities & Commodities: The Liquidity Rally
Why are markets rising while the political context is tense? The answer comes down to one figure: 1,000 Billion Dollars. That is the estimated amount of liquidity recently injected into the system, which directly propelled the S&P 500 and stocks higher.
On the commodities side, the rally is doubly supported by the influx of liquidity and the return of geopolitical risk, notably Trump’s threats against Iran, which reawaken the risk premium on Energy and Gold.
Synthesis & Trading Plan
- Buy USD/JPY: The political crisis in Japan is the main driver. Parliamentary instability weakens the Yen durably against the Dollar.
- Sell EUR/USD: The Euro is defenseless. Dollar seasonality and the absence of news in Europe point toward a test of 1.1600.
- GBP watch: Macro data (GDP) are good. Watch for the end of a correction to enter on the buy side, potentially against the Euro (Short EUR/GBP).
- Indices (S&P 500): Follow the money flow. Do not stand in front of the liquidity train (+1,000 Bn) despite technical divergences.
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Léo Lombardini
Trader, Economics & Quant
Passionate about market analysis and statistical modeling, Léo oversees the strategic allocation of the model portfolio and the development of Horacle Capital's quantitative frameworks, as well as writing weekly articles.
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