USD Outlook: Markets Eye 'Politicized' Fed Risks as Tariff Impact Deepens

Currency markets are bracing for a potential paradigm shift as analysts flag growing risks surrounding the independence of the Federal Reserve. Against a backdrop of aggressive protectionist trade policies, the US Dollar (USD) faces a complex outlook entering 2026.

Fed Independence in the Crosshairs

Market sentiment is increasingly weighed down by warnings that a “looming” leadership change at the Fed could lead to a “weakened, politicised” central bank. For Forex traders, any erosion of the Fed's autonomy poses a systemic risk to the Dollar, potentially decoupling monetary policy from pure economic data in favor of political expediency.

This uncertainty introduces a higher risk premium for US assets, potentially driving volatility in major pairs like EUR/USD and USD/JPY as investors reassess the long-term credibility of the greenback.

'Trump Tariffs' Reshape Trade Flows

While institutional risks loom, trade data indicates that protectionist policies are actively altering global capital flows. New data reveals the US swung to a $1.45 billion goods trade surplus with trading partners like Nigeria in late 2025, a sharp reversal attributed largely to tariffs.

• Trade Balance: The shift to a $1.45 billion surplus suggests tariffs are effectively narrowing the US trade deficit.
• Currency Support: Narrowing deficits traditionally support USD valuation in the short term.
• Geopolitical Pressure: Concerns over Trans-Atlantic alliances are adding bearish pressure to the EUR.
• Technical Note: Market monitoring of Fed speeches is required as policy divergence risks increase.