Criminal Investigation Raises Key Question: Whether Chair Powell Leaves the Fed in May

Economic

Summary:

A Justice Department investigation has intensified scrutiny over whether Fed Chair Jerome Powell will step down entirely in May or remain as a governor, a decision that could significantly shape Federal Reserve independence and determine how much influence President Trump gains over U.S. monetary policy.

The Justice Department’s investigation into Federal Reserve Chair Jerome Powell has brought heightened attention to a key drama that will play out at the central bank in the coming months: Will Powell leave the Fed when his term as chair ends, or will he take the unusual step of remaining a governor?

Powell’s term as Fed chair finishes on May 15, but because of the central bank’s complex structure, he has a separate term as one of seven members of its governing board that lasts until January 31, 2028. Historically, nearly all Fed chairs have stepped down from the board when they are no longer chair. But Powell could be the first in nearly 50 years to stay on as a governor.

Many Fed-watchers believe that the criminal investigation into Powell’s testimony about cost overruns for Fed building renovations was intended to intimidate him out of taking that step. If Powell stays on the board, it would deny the White House a chance to gain a majority, undercutting the Trump administration’s efforts to seize greater control over what has for decades been an institution largely insulated from day-to-day politics.

“I find it very difficult to see Powell leaving before midnight on Jan. 31, 2028,” said David Wilcox, a former top economist at the Fed and senior fellow at the Peterson Institute for International Economics. “This is a mortal threat to the governance structure of the Fed as we’ve known it for 90 years. And I think that Powell does take that threat exceedingly seriously, and therefore will believe that it is his solemn duty to continue to occupy his seat on the board of governors.”

Powell, 72, was appointed as Fed chair by Trump in 2018, and must step down from the position in May because his second four-year term is ending. He has declined several times to comment on his plans beyond that when asked by reporters. A spokesperson declined to comment for this story.

Trump has sought to push out Powell before his time is up, obsessively attacking him for not cutting rates as sharply as the president wants, particularly in light of ongoing concerns about high costs for groceries, utilities, and housing that have remained a salient political issue even as inflation has cooled.

On Tuesday, Trump highlighted that mortgage rates have declined in the past year. “If I had the help of the Fed, it would be easier,” he said. “But that jerk will be gone soon.”

Or maybe not.

Here is a look at the impacts of whether or not Powell stays on the board could have:

What happens if Powell stays on the board

Trump said Tuesday that he hopes to name a new Fed chair in the next few weeks. But that could get held up by the criminal investigation of Powell.

Several Republican senators, including at least two on the banking committee who would have to approve Trump’s nominees to the Fed, have expressed skepticism that Powell committed crimes during his testimony last June regarding the Fed’s $2.5 billion renovation of two office buildings, a project that Trump has criticized as excessive. That testimony is the subject of subpoenas sent to the Fed by U.S. attorney for the District of Columbia Jeanine Pirro.

Sen. Thom Tillis, a North Carolina Republican, said he would not vote for any Fed nominees until the legal cloud around Powell is resolved. That would be enough to delay a nomination from getting out of the banking committee.

If no new chair of the Fed’s board has been confirmed by May 15, then Powell could remain in that post until a replacement has been confirmed. As a result, the Fed might not cut interest rates anywhere near as quickly as Trump wants.

If Powell stays on as a governor even after he is no longer chair, Trump could still name someone to lead the Fed but that would give him a total of three appointments on the board — including two from his first term — and short of a majority.

So even if Trump nominates a chair who seeks to do the president’s bidding regarding interest rates, that person “would have very little persuasive power with his colleagues,” said Wilcox, who is also director of research at Bloomberg Economics. Powell, along with other members of the Fed’s 19-member interest-rate setting committee, could outvote the new chair. That hasn’t happened since 1986.

What happens if Powell leaves the board

In that case, Trump could nominate a fourth person to the board and gain a majority. He could even then add a fifth, if the Supreme Court allows his attempt to fire Governor Lisa Cook to proceed. The high court will hear her case on Wednesday.

A majority on the board would enable the White House to make sweeping changes to the Fed. Trump’s Treasury Secretary, Scott Bessent, has advocated numerous reforms to reduce the central bank’s influence in the economy and financial markets.

Trump’s majority on the Fed’s board could also remove some of the presidents of the 12 regional banks, who are members of the Fed’s rate-setting committee. The New York Fed president has a vote on the committee and four others vote on a rotating basis.

Several of those bank presidents have expressed opposition to the deep rate cuts that Trump has demanded. The board of governors could seek to have them fired if a chair wanted to do so.

What past Fed chairs have done

While nearly all Fed chairs have left the board of governors before their terms were up, there is some precedent for Powell to stay. In 1978, then-Chair Arthur Burns stayed on the board for about three weeks after his chairmanship ended. But in 1948, then-Fed chairman Marriner Eccles remained as a governor for three years after finishing as chair, in part because President Harry Truman asked him to remain.

In 1951, however, he played a key role in undercutting the Truman administration in a dispute over interest rates, which led to the Fed-Treasury Accord that established the modern Fed as a largely independent institution.

Eccles became a symbol of Fed independence, though some academics say that reputation is overstated. The Fed’s principal office building —- currently under renovation and at the center of the criminal investigation of Powell — is named after him.

Truman then appointed a Treasury official, William McChesney Martin, to the Fed chairmanship and assumed he would do his bidding. Yet Martin defied Truman and raised interest rates. Years later, Truman ran into Martin in New York City and called him a “traitor.” The Fed’s second office building in Washington is named after Martin.

“So it’s a cautionary tale also for Trump, thinking he’s going to get his own Fed chair in there,” said Lev Menand, a law professor at Columbia University who studies the Fed. “Martin didn’t do what Truman wanted.”

Source: AP

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

Add to Favorites

Adam

Stocks

MARKET WRAPS

European stocks fell Friday, losing ground against Thursday's higher close, as the trading week began winding down.

The region's leading bourses declined at the start of the opening bell when banks slipped though defense stocks would gain as concerns grow over President Trump's repeated position that the U.S. needs Greenland for security purposes.

London-listed miners, meanwhile, weighed on the FTSE 100 following falls in metal prices. Eased geopolitical tensions have tempered demand for safe-havens.

The movements come as concerns over AI deals, leverage and delayed returns on investment remained at the top of tech investors' minds, according to Swissquote.

As earnings season intensifies, U.S. tech results will face closer scrutiny as rising electricity, metals costs, higher memory-chip prices, and the risk of supply disruptions are weighing on outlook.

"Big Tech's ability to impress is diminishing, a risk that matters given its outsized weight in equity indices."

Elsewhere, European and NATO allies demonstrated support for Denmark with troop deployments to Greenland.

U.S. markets will be closed Monday as the country observes Martin Luther King Jr. Day.

Market Insight

Trump's ambitions for Greenland could trigger orders for European arms makers , with BAE Systems, Dassault Aviation, Rheinmetall and Thales the best-positioned to capture orders from European members of NATO and Denmark, Bernstein said.

U.S. bank results bode well for European peers and showed encouraging trends in trading, according to Keefe, Bruyette & Woods, adding that UBS looks best positioned among European banks to gain from these trends.

"Overall, despite the mixed share-price reactions, we believe the U.S. results reinforce our more constructive stance on the EU banks sub-sector, with [Barclays] remaining our top pick."

Stocks to Watch

A tie-up between Glencore and Rio Tinto looks increasingly likely to go ahead , RBC Capital Markets said. The companies last week said that they were in talks to create the world's largest miner.

A merger that was until recently dismissed as unserious "has now found its sweet spot after a strong copper rally, heightened resource scarcity fears and an Argentina turnaround."

U.S. Markets:

Stocks appeared poised to finish the week on a high ahead of industrial production and capacity utilization figures for the month of December, with futures pointing to further gains after chip stocks rallied in Thursday's session.

Forex:

The euro looks range-bound versus the dollar and the one-month implied volatility for the exchange rate remains near 5%. It is being favored as a funding currency in carry trades, where investors borrow in low interest-rate currencies to invest in higher-yielding ones, ING said.

The dollar pulled back slightly against a basket of currencies after reaching a six-week high Thursday, as the Japanese yen strengthened on the prospect of interventions to prop up the currency. Japan's Finance Minister Satsuki Katayama said Friday the country wouldn't rule out any options to counter the yen's recent sharp falls.

Bonds:

Eurozone government bond yields rose slightly in relatively quiet trading, with little in the way of impulse from economic data.

"The domestic macro backdrop gives investors faith to buy the new 10-year Bund above 2.8% or spread products above this level," Commerzbank said.

Eurozone government bond yield spreads have continued to trade with a tightening bias despite the already tight starting point and the busy issuance slate so far, Barclays said, adding there is a strong case for spreads to tighten further.

"In part, this reflects political/fiscal challenges in core/semi-core economies while the erstwhile peripheral bloc continues to keep political noise to the minimum with fiscal improvements."

Yields on U.K. government bonds rose, reversing some of their recent falls.

Gilt investors now await next week's U.K. inflation and jobs data for insights on the potential timing of the next BOE rate cut.

Yields on U.K. 10-year government bond yields were likely to fall by the end of 2026, according to ING.

Bond yield spreads of eurozone peripheral countries over Bunds tightened further, with Italian and Spanish spreads hitting levels unseen since 2008.

"[We] remain positive on Italy and Spain versus Germany," Jefferies said.

The outperformance of government bonds of eurozone peripheral countries will likely remain the dominant theme in 2026 , supported by stronger economic fundamentals, improving credit ratings and resilient flows, Societe Generale said, adding that France and Germany particularly will face headwinds.

Long-dated Treasury yields rose, while short-end yields edged lower in Asian afternoon trade, causing the curve to steepen .

Potential drivers for Treasury yields include industrial production and capacity utilisation data for December, as well as Federal Reserve speakers Michelle Bowman and Philip Jefferson.

Compensation to hold a longer-dated bond rather than a shorter one is expected to rise in both the U.S. and Europe in the next 12 months as bond issuance is set to increase significantly, according to Danske.

"Therefore, we expect long-term U.S. rates to move higher over the coming year even if the Federal Reserve continues to cut its policy rate target."

Danske forecasts the 10-year Treasury yield at 4.30% and 4.45% on six- and 12-month horizons, and the 10-year Bund yield at 2.90% on both six- and 12-months horizons.

Energy:

Oil prices were mixed as traders weighed risks of supply disruptions even as concerns over imminent U.S. military action in Iran fade.

"While risks have eased somewhat, they remain significant, keeping the market nervous in the short term. However, the longer this goes on without any U.S. intervention, the risk premium will continue to fade, allowing more bearish fundamentals to dominate," ING said.

Gas

European natural-gas prices extended their rally, hovering near 35 euros a megawatt hour as forecasts of colder weather across parts of Europe raised supply concerns. The benchmark Dutch TTF contract is up 5.2% and is headed for a weekly gain of 23%.

Metals:

Gold prices slipped in early trading after the latest U.S. data showed unemployment claims dropped last week, lowering probabilities of imminent interest-rate cuts by the Federal Reserve.

That said gold was still on track for a weekly gain of more than 2%.

Silver prices were on track for a weekly gain of 15% after hitting a fresh record earlier this week

"Silver continues to attract speculative interest, increasingly from both buyers and sellers, resulting in erratic price swings and challenging trading conditions," Saxo Bank said.

Copper prices fell back below the $13,000 mark as investors booked profits after they hit a fresh record last week.

"This week the market was reminded of the strong demand dynamics in China, with imports remaining near record highs. However, a surge in investor appetite for real assets such as commodities in recent weeks has raised concerns that recent gains have been driven by speculators," ANZ Research said.

EMEA HEADLINES

Porsche Deliveries Fall on China Woes and Model Gaps

Porsche car deliveries fell 10% in 2025 as demand was hit by a slowdown in luxury spending in China and as it ceased production of its 718 Boxster and 718 Cayman models through the year.

The German luxury sports-car maker said Friday that it delivered 279,449 cars in the year, down from 310,718 in 2024.

Trump Was Told Attack on Iran Wouldn't Guarantee Collapse of Regime

WASHINGTON-President Trump was advised that a large-scale strike against Iran was unlikely to make the government fall and could spark a wider conflict, U.S. officials said, and for now will monitor how Tehran handles protesters before deciding on the scope of a potential attack.

The U.S. would need more military firepower in the Middle East both to launch a large-scale strike and protect American forces in the region and allies such as Israel should Iran retaliate, the advisers told Trump, the officials said.

Equinor Can Resume Work on Offshore Wind Project Trump Tried to Halt

Work on New York's Empire Wind project can resume after a federal judge on Thursday said he wasn't convinced construction had to stop immediately.

At a hearing in Washington, D.C. on Thursday, U.S. District Judge Carl Nichols said Empire Wind-being developed by Norwegian company Equinor-proved it would "suffer irreparable harm" by the current hiatus the Trump administration ordered last month. He said the harm from the suspension "outweighs the harms laid out by the government in this stage" of the construction.

Investors Flock to Buy Eurozone Government Bonds Even as Supply Jumps

Investors have shown great appetite for a heavy supply of eurozone government bonds so far in 2026, driven by large cash availability and as investors continue to diversify away from U.S. assets.

Gross eurozone bond supply is set to rise to a record high this year as Germany proceeds with substantial fiscal stimulus, with many other countries following suit as they seek to boost defense spending.

British American Tobacco to End South African Manufacturing

British American Tobacco's South African subsidiary said it would close its only factory in the country by the end of the year, citing a booming black market.

BAT South Africa said it would cease cigarette production in South Africa because of "the devastating impact of the illicit cigarette trade" in the country. The move comes after the company decided to close its Mozambican operations in December.

GLOBAL NEWS

Chinese AI Developers Say They Can't Beat America Without Better Chips

Source: morningstar

Risk Warnings and Disclaimers

Add to Favorites

Michelle Reid

Data Interpretation

Remarks of Officials

Economic

Central Bank

Traders' Opinions

Stocks

Morgan Stanley analysts predict that liquidity in China's stock market will remain robust through the first quarter, even after Beijing moved to tighten regulations on margin financing.

In a recent client note, analysts including Laura Wang and Chloe Liu argued that the new measures are designed to temper market enthusiasm without disrupting existing investments. They contend that the primary forces fueling the market are still in play.

"The key drivers of improved A-share liquidity are reallocations from bond investments and term deposits, alongside sustained insurance inflows," the analysts explained.

Beijing Taps the Brakes on Margin Trading

Chinese regulators recently announced they will raise the margin collateral ratio from 80% to 100%. The decision comes amid concerns about a potential speculative bubble, fueled by intense risk-taking in some corners of the stock market.

The early weeks of 2026 have seen rollercoaster price action in smaller Chinese tech stocks, as investors chase developments in sectors from semiconductors to commercial rockets.

According to Morgan Stanley, the rule change signals the government's desire to foster a "slow-bull" market that rewards long-term investment. The move is a targeted effort to curb excessive leverage rather than a broad market clampdown.

For context, A-shares refer to the stocks of mainland Chinese companies that trade in yuan on the Shanghai or Shenzhen exchanges, primarily accessible to domestic investors. H-shares are similar but are listed in Hong Kong and trade in Hong Kong dollars.

Central Bank Signals an Accommodative Stance

While margin rules are tightening, the People's Bank of China (PBOC) is signaling broader support for the economy. The central bank recently cut its relending rates, which Morgan Stanley interprets as evidence of an "overall accommodative stance from policymakers towards the economy and the market."

On Thursday, PBOC Deputy Governor Zou Lan confirmed the central bank will reduce rates on its structural policy tools by 25 basis points on January 19. These tools are used to channel credit to specific sectors of the economy.

In line with this policy, China is also expanding its support for key industries:

• A re-lending program for tech innovation will be increased by 400 billion yuan to a total of 1.2 trillion yuan, targeting small and medium-sized tech firms.

• The lending quota for agricultural and small businesses will be raised by 500 billion yuan.

Outlook: Temporary Volatility Expected

The combination of targeted tightening and broad monetary support may lead to some short-term market turbulence. The Morgan Stanley team anticipates that sectors heavily reliant on margin financing, particularly technology and innovation, could experience the most pronounced effects.

However, they conclude that any such adjustments are likely to be "temporary and manageable," with underlying liquidity drivers remaining strong.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Justin

Cryptocurrency

Forex

Argentina-based crypto exchange Lemon has officially rolled out the country's first Bitcoin-backed Visa credit card, marking a shift away from traditional crypto debit models toward collateralized credit. The product is now available to Lemon's user base of more than 5.5 million people.

Unlike debit cards that automatically sell crypto at the point of purchase, Lemon's new card allows users to spend Argentine pesos while keeping their Bitcoin intact.

How the Bitcoin-Backed Credit Model Works

The card is built on a Collateralized Debt Position structure. Users lock 0.01 BTC as collateral, roughly $900 to $960 at current prices, and receive an immediate credit limit of 1 million Argentine pesos. Spending is settled in local currency, while the Bitcoin remains untouched in custody.

The design removes forced liquidation entirely. Users access short-term peso liquidity for daily expenses without selling Bitcoin, preserving full exposure to price movements. Approval is based on collateral value and account history, with no credit checks or traditional banking requirements.

Maintenance fees are waived for the first three months under a partnership with Rootstock. After that period, the card carries a monthly fee of about 7,500 pesos unless the user buys at least $150 in crypto each month.

Why Argentina Is a Natural Launch Market

Crypto adoption in Argentina continues to accelerate. As of January 2026, nearly 20% of the population, around 8.6 million people, actively uses cryptocurrency, the highest penetration rate in Latin America.

On Lemon's platform, Bitcoin has become the most widely held asset, overtaking both stablecoin dollar proxies and the Argentine peso itself. The card effectively formalizes Bitcoin's role as a store of value while unlocking its utility for everyday spending.

What Comes Next

Lemon plans to expand the product's functionality in future phases. The roadmap includes customizable collateral ratios and the option to settle dollar-denominated purchases directly with stablecoins such as USDC and USDT.

The launch builds on Lemon's earlier Visa offering from 2021, which introduced BTC cashback on purchases. This time, the focus has shifted from rewards to credit—turning Bitcoin holdings into a spending buffer without requiring users to give them up.

Source: CryptoSlate

Risk Warnings and Disclaimers

Add to Favorites

Michael Ross

Economic

Data Interpretation

Central Bank

Deutsche Bank has raised its forecast for UK GDP growth in 2026 to 1.2%, an upward revision from its previous estimate of 1.1%. The adjustment, which restores the bank's projection from a month prior, follows the release of stronger-than-anticipated economic data.

This renewed optimism signals a significant shift in the short-term outlook. The bank now predicts the UK will sidestep a recession in the fourth quarter of 2025, forecasting 0.2% quarter-on-quarter growth instead of a previously anticipated decline. The revision was driven by a notable rebound in November GDP figures and upward adjustments to data from previous months.

Services and Production Sectors Fuel Rebound

The economic strength seen in November was broad-based. The UK's services sector recovered robustly after contracting by 0.3% in October, while the production sector expanded by 1.1% month-on-month.

A closer look at the data reveals specific drivers of this growth:

• Services: Activity was propelled by gains in leisure (0.9%), information and communication (1.6%), and professional services (1.7%).

• Manufacturing: A 25% surge in motor vehicle production provided a major lift as output in the auto sector normalized.

However, not all sectors showed strength. Construction output registered a 1.3% month-on-month decline, marking its second consecutive month of contraction.

Key Tailwinds Supporting the UK Economy

Looking ahead to 2026, Deutsche Bank identifies several positive factors that are expected to support continued economic growth. These tailwinds include falling inflation, which is projected to approach target levels by spring, thereby boosting real disposable incomes for households.

Other supportive elements include:

• Favorable credit conditions

• Anticipated interest rate cuts from the Bank of England

• Increased public sector spending

• The government's ongoing deregulation initiatives

Despite the improved growth forecast, the bank has maintained its projection for monetary policy. It continues to expect the Bank of England's key interest rate to end 2026 at 3.25%, down from the current rate of 3.75%.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Isaac Bennett

Remarks of Officials

Political

The United States is blocking Spain from key preparatory meetings for the upcoming G-20 summit, a move that signals the Trump administration's continued willingness to reshape the global order by sidelining traditional allies.

Washington is hosting the gathering of the world's leading economies on December 14-15 at President Donald Trump's Miami golf resort. Using its position as host, the administration is curbing input from countries like Spain, which are not official G-20 members but are typically invited to participate.

This tactic is becoming a hallmark of the White House's foreign policy, which increasingly shuts out allies on the world stage, particularly those that do not align with its demands.

A Pattern of Pressure on Allies

The decision regarding Spain is not an isolated incident. The US has already taken similar steps against other nations:

• South Africa: Barred from attending this year's G-20 summit after the country's leadership disputed President Trump's false claims that White Afrikaners were facing genocide.

• NATO Allies: The administration is also rebuffing overtures from NATO partners that have refused Trump's demands to facilitate the handover of Greenland, a semi-autonomous Danish territory.

Spain has had its own points of friction with the Trump administration. The country was the only NATO ally to reject a US-backed initiative to spend 5% of its gross domestic product on defense. Madrid also forcefully criticized Trump for his strike that deposed Venezuelan leader Nicolas Maduro.

"Spain is not a team player," Trump commented last year.

Spain's G-20 Role Sharply Reduced

As a result, Spanish officials are now excluded from all preparatory and ministerial meetings for the G-20 summit, according to two people familiar with the plans. These sessions are critical, as they are where most of the substantive work and negotiations for the event are conducted.

A Spanish government spokesperson confirmed that Prime Minister Pedro Sanchez will still attend the main leaders' summit in December.

Sources familiar with the decision, who requested anonymity, said the move is part of a broader US campaign to narrow the G-20's agenda to economic issues and shrink the number of participating countries. A White House statement confirmed that other traditional non-member invitees, such as Egypt and the Netherlands, were also excluded from the first preparatory meeting in December.

The White House did not respond to a request for comment. The story was first reported by the newspaper El Confidencial.

Rewarding Friends, Punishing Foes

The administration's approach creates a sharp contrast in how it treats different nations. While South Africa, a full G-20 member, faced a US boycott of the Johannesburg summit it hosted last year, other countries have been welcomed.

US Secretary of State Marco Rubio criticized South Africa in December, writing that its "economy has stagnated under its burdensome regulatory regime driven by racial grievance."

In contrast, the US has extended an invitation to Poland for this year's summit. Trump officials have actively courted the country, which is a major defense spender in NATO and boasts a growing economy. Notably, Poland was the only non-G-20 country present at the December planning meeting.

"Poland's success," Rubio wrote, "shows how partnership with the United States and American companies can promote mutual prosperity and growth."

The Political Context in Madrid

Spain is the last major European nation led by a socialist, Prime Minister Pedro Sanchez, who governs with the support of left-wing parties that are highly critical of both the United States and NATO.

Furthermore, Spain has maintained ties with Nicolas Maduro's regime in Venezuela, even though it does not recognize his victory in the widely disputed 2024 election. Former Spanish Prime Minister Jose Luis Rodríguez Zapatero, also a socialist, has strong connections to the Maduro government and has served as an intermediary in Venezuela for years. Just last week, the government in Caracas thanked him for his role in mediating the release of political prisoners.

Risk Warnings and Disclaimers

Add to Favorites

Warren Takunda

Economic

It's still early doors, but the Australian dollar is the year's best performing G10 currency ahead of the rebounding U.S. dollar.

"This has come despite the turnaround in certain commodities. Iron ore started the year well but in recent days has corrected lower while momentum in gold is softening and there was a sharp drop in energy prices yesterday," says Derek Halpenny, Head of Research, Global Markets EMEA & International Securities at MUFG Bank.

MUFG analysis finds that outperformance is linked to expectations for the Reserve Bank of Australia to raise interest rates later in the year.

Money market pricing - gleaned from the OIS curve - shows approximately 40 basis points of hikes are expected from the RBA this year.

This supports Aussie bond yields and Australia's interest rate-linked products, making them look increasingly attractive to global investors in what is known as the carry trade.

In fact, research by RBC bank shows the Aussie dollar now enjoys the highest level of 'carry' in the G10, having recently surpassed the pound. Why the Australian Dollar is 2026 High Flyer_1

Why the Australian Dollar is 2026 High Flyer_1

40bp worth of hikes means the market is effectively priced for nearly two full 25bp rate rises.

"That scale of tightening is the largest amongst all G10 central banks at the moment and underlines expectations of better economic conditions ahead," says Halpenny.

Recent data shows Australia's inflation rate is anchored well above the RBA's target and household spending data released this week showed a 1.0% m/m gain in November, which followed a 1.4% MoM gain in October.

Strong consumer demand will underpin those above-target inflation levels, and the RBA will judge higher interest rates can limit inflation's gains.

MUFG notes that RBA communications in December from Governor Bullock and in January from Deputy Governor Hauser indicated the RBA sees the next move more likely being a hike rather than a cut.

On January 08, Hauser said the RBA would be cautious when considering rate moves, but warned if consumption data was matched with better labour market data, a first hike would come sooner.

Why the Australian Dollar is 2026 High Flyer_2

Above: AUD performance in 2026.

MUFG predicts that Australian consumer spending will be further supported this year by tax legislation already passed that will see the basic income tax rate cut from 16% to 15%.

Elsewhere, Halpenny notes that the performance of CNY is also helping provide support for AUD. "CNY is in fact the second-best performing Asian currency year-to-date."

"Trade data this week helped provide CNY with support," he adds. China exports jumped 6.6% y/y, helping lift the trade surplus to USD 11.4.1bn, up from USD 111.7bn.

MUFG thinks pressure to allow CNY to strengthen will continue to build.

"The fundamental backdrop looks supportive for further gradual AUD gains," says Halpenny.