The British pound rose in the European market on Tuesday against a basket of global currencies, extending its recovery for a second consecutive session from a three-week low against the US dollar, supported by weakness in the US currency ahead of the release of key US inflation data for December.

With expectations for a Bank of England interest rate cut in February remaining weak, investors are awaiting later today a speech by Bank of England Governor Andrew Bailey at an event hosted by the UK central bank, which is expected to provide fresh clues on the trajectory of UK monetary policy over the course of this year.

Price Overview

• British pound exchange rate today: The pound rose 0.1% against the dollar to $1.3476, from an opening level of $1.3466, with the session low recorded at $1.3462.

• On Monday, the pound gained around 0.5% against the dollar, marking its first daily gain in five sessions, after earlier touching a three-week low at $1.3391.

• Beyond bargain buying from lower levels, the pound was also supported by rising concerns over the independence of the Federal Reserve.

US Inflation

Key US inflation data for December are due later today, and are expected to shed light on the extent of inflationary pressures facing Federal Reserve policymakers.

At the same time, investors are still digesting the implications of the Trump administration’s investigation into Jerome Powell, a move that has drawn criticism from former Federal Reserve officials and marked a sharp escalation in President Donald Trump’s campaign to pressure the central bank into cutting interest rates at a faster pace.

UK Interest Rates

• Market pricing for a 25-basis-point interest rate cut by the Bank of England at its February meeting remains below 20%.

• To reassess these expectations, investors are closely watching later today the speech by Governor Andrew Bailey, which is expected to include strong signals regarding the future path of UK monetary policy this year.

Outlook for the British Pound

At Economies.com, we expect that if Andrew Bailey’s comments come across as more hawkish than markets anticipate, expectations for a February rate cut will decline further, which would support additional upside in the British pound.

The Japanese yen weakened in the Asian market on Tuesday against a basket of major and minor currencies, extending its losses for a sixth consecutive session against the US dollar and hitting an 18-month low, after reports said that Japanese Prime Minister Sanae Takaichi intends to dissolve the lower house and call for early elections in the near term.

The yen is also under pressure from easing inflationary pressures on Bank of Japan policymakers, which has led to a decline in expectations for a Japanese interest rate hike later this month.

Price Overview

• Japanese yen exchange rate today: The US dollar rose 0.5% against the yen to ¥158.91, the highest level since July 2024, from an opening level of ¥158.132, with the session low recorded at ¥157.90.

• The yen ended Monday’s trading down 0.15% against the dollar, marking its fifth consecutive daily loss, due to political uncertainty in Japan.

Early Elections

Japan’s public broadcaster NHK reported on Monday that Prime Minister Sanae Takaichi is seriously considering dissolving the lower house and calling an early general election in February.

Kyodo News reported on Tuesday that Takaichi has informed ruling party leadership of her intention to dissolve the lower house (parliament) at the start of its regular session scheduled for January 23.

Hirofumi Yoshimura, leader of the Japan Innovation Party and a coalition partner in the ruling government, said that Takaichi may call an early general election.

The move to dissolve the current parliament comes as Takaichi seeks to strengthen her public mandate and secure a comfortable parliamentary majority to ensure passage of the fiscal year 2026 budget and proposed economic reforms, particularly as the current government faces difficulties passing legislation in a divided parliament.

These reports have fueled political uncertainty among investors, which was immediately reflected in yen movements in foreign exchange markets, as markets assess the potential impact of early elections on future Bank of Japan decisions regarding interest rate hikes.

Japanese Interest Rates

• Market pricing for a quarter-point interest rate hike by the Bank of Japan at its January meeting remains below 10%.

• The Bank of Japan meets on January 22–23 to assess domestic economic developments and determine appropriate monetary tools during this sensitive phase for the world’s fourth-largest economy.

Gold prices rose during Monday’s trading, supported by a weaker US dollar against most major currencies, amid growing investor concerns over the independence of the Federal Reserve.

This followed the US Department of Justice opening a criminal investigation into Federal Reserve Chair Jerome Powell, a move widely seen as an escalation by President Donald Trump in his efforts to pressure the central bank.

In an unusual live video statement late Sunday, Powell confirmed that federal prosecutors had launched a criminal investigation related to his testimony before the Senate Banking Committee regarding the renovation of the Federal Reserve’s office buildings.

Powell said the investigation represents another attempt by Trump to influence the central bank’s monetary policy, stressing that he will not yield to such pressure before his term as Fed chair ends in May.

Former Fed Chair Janet Yellen criticized the investigation, warning that it threatens the independence of the central bank and describing the move as pushing the country toward “banana republic” territory.

Meanwhile, the US Dollar Index fell 0.3% by 20:35 GMT to 98.8 points, after hitting a high of 99.2 and a low of 98.6.

In trading, spot gold jumped 2.5% to $4,613.3 per ounce by 20:39 GMT.

Federal prosecutors have opened a criminal investigation into US Federal Reserve Chair Jerome Powell over his testimony before Congress last June regarding the $2.5 billion renovation project of the central bank’s headquarters in Washington, DC.

This shocking move against the independent Federal Reserve was met with an equally unprecedented response, as Powell released a video statement late Sunday saying the investigation was a direct result of his ongoing conflict with the US administration over interest rate policy. He said the probe was the outcome of “persistent threats and pressure” from the administration.

Powell said in a statement issued late Sunday: “The threat of criminal charges is the result of the Federal Reserve setting interest rates based on its best judgment of what serves the public interest, rather than complying with the president’s preferences.”

The investigation sends a deeply troubling signal to Powell, and to anyone who may lead the Federal Reserve in the future. President Donald Trump’s sustained attacks on the central bank chief—whom he has openly said he will not renominate—have already dealt a significant blow to the long-standing tradition of political independence at the Federal Reserve. Trump has repeatedly said he believes he should have a say in interest rate decisions.

Opening a criminal investigation, however, takes Trump’s conflict with the Fed to an unprecedented level. It signals that whoever Trump selects to replace Powell when his term ends in May will face ongoing pressure from the administration to cut interest rates.

Investors and economists around the world place paramount importance on the Federal Reserve’s independence, as it ensures policymakers focus on the long-term consequences of monetary policy rather than short-term political considerations when steering the economy.

On Sunday, Powell explicitly linked the investigation to the issue of Fed independence and its ability to set interest rates without political interference, saying: “This case is about whether the Federal Reserve will be able to continue setting interest rates based on evidence and economic conditions, or whether monetary policy will instead be conducted through political pressure or intimidation.”

Justice Department spokesperson Chad Gilmartin declined to comment on the investigation, but said in a statement that the attorney general wants to “prioritize investigations into any misuse of taxpayer funds.”

The White House referred inquiries to the Justice Department’s statement. In an interview with NBC News on Sunday, Trump denied knowledge of the investigation, saying: “I don’t know anything about it, but he’s certainly not very good at running the Federal Reserve, and not very good at building buildings.”

A Year-Long Pressure Campaign

Trump and his allies have repeatedly attacked Powell over the past year for not cutting interest rates at the pace the president wants. While the Federal Reserve cut rates three times in the second half of last year, officials have recently said they do not anticipate another cut in the near term.

Trump’s pressure campaign has included a stream of personal insults directed at Powell, later escalating into threats to remove him. Powell has repeatedly stated that Trump does not have the legal authority to fire him.

Later in the year, Trump targeted Federal Reserve Governor Lisa Cook, who was appointed by former president Joe Biden. Trump and his allies accused her of mortgage fraud and cited those allegations when she was dismissed in August, despite no criminal charges being filed against her. The Supreme Court is scheduled to consider later this month whether Trump had the authority to remove Cook.

The Fed headquarters renovation project has also been a persistent source of controversy. Powell testified before Congress in June, explaining that the project was carried out in coordination with multiple agencies and that its cost evolved over time.

Trump threatened to sue Powell over the project, saying last month that he was considering “filing a case against Powell for incompetence.”

Trump allies, including Federal Housing Finance Agency Director Bill Pulte and Office of Management and Budget Director Russ Vought, accused those overseeing the project of mismanagement. The Federal Reserve, however, said the upgrades to the decades-old buildings were necessary, including asbestos removal and major updates to electrical and ventilation systems.

Tensions peaked in July when Trump joined Powell for a tour of the renovation site. During the visit, Powell corrected Trump’s claims about the project’s cost in front of reporters, a moment that visibly underscored the strain between the two men.

Powell’s Expected Successor

The federal investigation comes as Trump prepares to announce his choice to succeed Powell when his term ends in May. The decision is expected to conclude a months-long search for what is widely regarded as one of the most influential positions in the global economy.

Trump has hinted that the next Fed chair could be Kevin Hassett, director of the National Economic Council, but he has also recently interviewed former Fed governor Kevin Warsh and is expected to interview Rick Rieder, BlackRock’s chief investment officer for global fixed income.

Trump said he will announce his pick “early” this year.

Following the announcement of the investigation on Sunday evening, Republican Senator Thom Tillis of North Carolina said in a post on X that he would “oppose confirming any Federal Reserve nominee—including the next Fed chair—until this legal matter is fully resolved.” Tillis has said he does not plan to seek re-election.

Democratic Senator Elizabeth Warren of Massachusetts echoed that stance, saying in a statement: “The Senate should not move forward with confirming any Trump nominee to the Federal Reserve, including the next chair.”

Senate Minority Leader Chuck Schumer also criticized the move, saying in a statement that “Trump’s attack on the independence of the Federal Reserve continues, and it threatens the strength and stability of our economy.”

Schumer added: “This is the kind of bullying we have come to expect from Donald Trump and his allies. Anyone who shows independence or refuses to fall in line with Trump gets investigated.”

Investors and analysts also expressed concern about the investigation and its potential implications for the world’s largest economy.

Krishna Guha, vice chairman at Evercore ISI, wrote in a note: “We are shocked by this deeply concerning development, which came abruptly after a period when tensions between Trump and the Federal Reserve appeared to have been contained.”

He added: “As of this writing, we are still seeking more information and context, but on its face, it appears that the administration and the central bank have now entered an open confrontation.”