December’s softer-than-expected US core CPI suggests tariff-driven inflation pressures may be fading, but shutdown-related distortions leave markets confident the Fed will hold rates steady in January, OCBC's FX analysts Sim Moh Siong and Christopher Wong note.

USD downside eyed in 1H26 amid political uncertainty

"December’s softer-than-expected US core CPI suggests tariff pass-through may have peaked. Yet, data distortions from the government shutdown mean markets still expect the Fed to keep rates steady at its January meeting."

"Inflation remains secondary to labour data for policy decisions. We anticipate modest USD weakness in 1H26, driven by dovish risk from Fed leadership changes and heightened scrutiny over Fed independence—especially with oral arguments in the Lisa Cook case on 21 January, ahead of the FOMC meeting on 27-28 January."

"However, cyclical strength in US data continues to argue for USD upside. A USD rebound could come sooner than expected if US growth accelerates ahead of mid-term elections."