Morning Update: Powell’s Response Shakes Markets

Ankur Banerjee provides a preview of the day ahead in European and global markets. Investors remain focused on the escalating conflict between U.S. President Donald Trump and Federal Reserve Chair Jerome Powell, who is pushing back against attempts to exert political control over the Fed and its interest rate decisions.

Meanwhile, growing turmoil in Iran—where over 500 people have reportedly been killed, according to human rights groups—adds to the geopolitical uncertainties shaping market sentiment at the start of 2026, supporting demand for safe-haven assets.

Markets opened Monday with shocking news that the Trump administration had threatened to indict Powell over his Congressional testimony last summer concerning a Fed building renovation. Powell described this as a “pretext” aimed at increasing political influence over monetary policy.

“This issue centers on whether the Fed can continue setting interest rates based on data and economic realities, or if monetary policy will instead be shaped by political pressure and intimidation,” Powell stated.

The initial market reaction saw the dollar weaken and stock futures decline, although the impact on interest rate policy remains unclear. Gold prices surged past $4,600 per ounce as investors sought refuge.

Despite the unsettling news, market responses were measured, with no signs of panic selling as investors await further clarity on the Fed’s independence and the future path of interest rates.

Markets may now generally anticipate that the Federal Reserve will yield to Trump’s influence and ease interest rates freely once a new Fed chair takes over after Powell’s term ends in May. Futures pricing currently reflects expectations of two rate cuts this year.

With Japanese markets closed on Monday, no cash trading occurred in Treasuries during Asian hours. Attention will shift to the Treasury market when London trading begins.

Key events that could impact markets on Monday include: Germany’s November current account balance and the euro zone Sentix investor confidence index for January.

Sources: Reuters