US monetary policy expectations may be too hawkish, with political pressures potentially driving looser policy and weighing on the US Dollar (USD). Trump’s moves to reshape the Fed, combined with proposed residency rules for regional presidents, could shift FOMC dynamics next year, Commerzbank's Head of FX and Commodity Research Thu Lan Nguyen notes.

Trump pushes to influence Fed appointments

"At this point, there remains a gap between what is priced into the market and what our expectations are. While the Fed Funds Futures suggest a policy rate of around 3% by the end of 2026, we expect a value closer to 2.5%. The reason behind this is our assumption that the central bankers will eventually yield to political pressure and loosen monetary policy more than would actually be necessary. This, in turn, would be bad news for the US dollar."

"The US President Trump has already initiated efforts to replace Fed Governors with close allies (Stephen Miran, Michelle Bowman, and Christopher Waller). However, so far, they represent a minority. Even if he appoints a new Fed Chair next year, there would be just four out of twelve votes in the Federal Open Market Committee (FOMC) under his influence. Efforts to remove Fed Governor Lisa Cook have so far been blocked by US courts."

"The US Treasury Secretary Scott Bessent is currently advocating for a new regulation requiring candidates for regional Fed President positions to have lived in the relevant district for at least three years to qualify. Interestingly, three current Fed Presidents apparently do not meet this criterion. If Bessent succeeds in pushing this rule through, the next wave of dismissals could be imminent. Coincidentally, the most hawkish voices have recently come from the ranks of these regional Fed Presidents."