When the First Crack of 2026 Appears in US Treasuries

The second full week of 2026 was dominated by high-level political and macro headlines, leaving markets in a constant state of reassessment rather than conviction. Traders were confronted with a dense mix of headlines, ranging from renewed scrutiny of the Fed’s independence to mounting speculation over who will succeed Jerome Powell as Fed chair.

At the same time, incoming US data reinforced the message that the Fed is in no hurry to deliver another rate cut. Firm labor market indicators, resilient regional manufacturing surveys, and inflation readings showing no further progress on disinflation kept expectations for near-term easing under pressure, pushing markets to further scale back bets on a Q1 or even early Q2 move.

Geopolitical risks also remained fluid. Fears of imminent US military intervention in Iran eased as Washington adopted a more cautious tone, helping to calm safe-haven demand. However, attention quickly shifted to a new flashpoint, with rising tension between the US and Europe over Greenland introducing fresh political and trade uncertainty into the global outlook.

While markets are still digesting these developments, one move stood out clearly by week’s end: the late selloff in US Treasuries. The 10-year yield broke decisively above the key 4.2% level, signaling a potential shift toward higher term premiums. The impact on US equities and Dollar has so far been restrained, but history suggests such yield moves rarely remain isolated for long.

In currencies, Kiwi finished the week as the strongest performer, supported by a string of upbeat domestic data including surging business confidence and a sharp rebound in manufacturing activity. Loonie tied with Dollar for second place. Canadian Dollar found some support as it attempted to claw back recent losses, aided in part by optimism surrounding Canada’s trade agreement with China following Prime Minister Mark Carney’s visit to Beijing.

European currencies underperformed. Euro ended as the weakest major, followed by Swiss Franc and then Sterling, with political and trade risks linked to Greenland adding to existing growth concerns across the region. Yen ended mixed, rebounding intermittently on talk of joint Japan-US intervention and earlier BoJ tightening, while Aussie also traded sideways in the middle of the pack.

US Data Keeps Fed in No Hurry as Cut Bets Fade

US economic data over the past week delivered a consistent message: conditions remain firm enough to keep the Fed firmly on hold. While none of the releases were individually dramatic, together they reinforced the view that policy easing is not imminent and that downside growth risks remain contained.

Inflation data for December showed no further progress toward disinflation. Headline CPI held at 2.7%, while core CPI stayed at 2.6%, undershooting expectations only marginally. The absence of renewed cooling was enough to keep hawkish voices within the FOMC alert to the risk that inflation pressures could linger longer than hoped.

The labor market provided additional of support for that stance. Initial jobless claims fell back below the 200k mark, one of the lowest readings in around a year, signaling that layoffs remain limited. The data directly counters concerns among Fed doves that a sharper labor-market deterioration might be unfolding beneath the surface.

Manufacturing indicators also surprised on the upside. The Empire State index jumped from -3.9 to 7.7 in January, while the Philly Fed survey surged from -10.2 to 12.6. While regional data can be volatile, the synchronized rebound reinforced the perception that US activity has reaccelerated into the new year.

As a result, rate-cut expectations were pared back further. Futures pricing now assigns only around 21% probability to a 25bp cut at the March meeting, down from close to 30% just a week earlier. Markets are increasingly comfortable with the idea that Q1 easing is off the table.

More notably, confidence in a cut by the end of June has also eroded. Odds for a move by then slipped to just above 60%, compared with roughly 73% a week ago. At that level, markets are no longer pricing easing as a base case for the first half of the year.

Fed Chair Succession Shifts as Warsh Emerges as Front-Runner

Another key factor reshaping expectations for US monetary policy this week was renewed focus on who will succeed Jerome Powell when his term as Fed chair ends later this year. While markets have long viewed the race as a two-horse contest, the balance appears to have shifted meaningfully over the past few days.

The contest has centered on National Economic Council Director Kevin Hassett and former Fed Governor Kevin Warsh. Until recently, Hassett was widely seen as President Donald Trump’s preferred choice, given his close alignment with the administration’s economic agenda.

That perception changed after Trump publicly suggested he would prefer Hassett to remain in his current role as his top economic adviser. Praising Hassett during a White House appearance, Trump’s remarks were interpreted by markets as a signal that he may be reluctant to move him out of the NEC.

As a result, Warsh is increasingly viewed as the more likely candidate. Markets generally perceive Warsh as more hawkish, more independent, and more committed to monetary discipline than Hassett. His background as a former Fed governor and his emphasis on price stability have bolstered his credibility among investors concerned about inflation risks.

In policy terms, a Warsh appointment would likely reinforce the Fed’s cautious stance. He is seen as less inclined to front-load rate cuts and more focused on ensuring inflation is decisively under control before easing policy, especially in an environment where inflation expectations remain sensitive.

Crucially, Warsh is also viewed as better positioned to defend the Fed’s institutional independence. At a time when political pressure on the central bank has become a key market concern, that distinction carries significant weight in shaping long-term rate expectations.

If Warsh emerges as Trump’s nominee, the probability of an early rate cut in the first half of the year diminishes further. Even expectations for easing later in the year would likely be tempered.

Fed Independence Shock Reprices Credibility and Yields

One of the most consequential developments shaping markets at the start of 2026 has been the sharp rise in political risk surrounding the Fed. The focus has been on Chair Jerome Powell, who is now under federal criminal investigation related to the renovation of the Fed’s headquarters and his congressional testimony on the issue.

What set this episode apart was Powell’s unusually direct response. In a blunt public statement, he warned that “the threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President.”

Markets reacted less with panic than with repricing. The core concern is not the legal outcome itself, but the signal it sends about political interference in monetary policy. Any perception that the Fed’s independence is being eroded risks undermining confidence in its commitment to price stability.

That concern quickly gained international dimensions. Fourteen major global central bank leaders issued a rare joint statement in support of Powell, emphasizing that central bank independence is a cornerstone of price, financial, and economic stability. The coordinated response highlighted how closely global policymakers are watching developments in Washington.

From a market perspective, the implications are clearest in the bond market. Investors worry that diminished institutional credibility could lift long-term inflation expectations, forcing markets to demand additional compensation for holding longer-dated US Treasuries. That dynamic helps explain the steepening pressure seen at the long end of the curve.

This risk was explicitly flagged by Chicago Fed President Austan Goolsbee, who warned that “anything that’s infringing or attacking the independence of the central bank is a mess.” Speaking to CNBC, Goolsbee cautioned that political interference would almost certainly cause inflation to “come roaring back.”

Importantly, this is not a near-term policy issue alone. Even if the Fed maintains its current stance, lingering doubts about independence could embed a higher structural term premium into yields, altering financial conditions regardless of policy rates. In that sense, the Fed independence risk is already feeding into markets. The selloff in Treasuries may be an early signal that investors are reassessing not just the path of rates, but the credibility framework underpinning US monetary policy.

Greenland Standoff Revives Tariff Risk, Clouds Inflation Outlook

A fourth theme weighing on markets this week was the re-emergence of tariff risk, this time linked to rising tension between the US and Europe over Greenland. While not yet reflected in hard policy action, the rhetoric alone has been enough to reintroduce tariffs into the inflation conversation.

Trump reiterated forcefully his view that US control over Greenland is essential for national security, citing concerns over China and Russia. Although the US already maintains a military presence on the island, Trump framed the issue as strategic rather than symbolic.

More importantly for markets, Trump suggested tariffs could be used as leverage against countries that “don’t go along with Greenland.” For inflation dynamics, timing matters. With US inflation no longer falling and the Fed already reluctant to ease policy quickly, even a temporary inflation uplift could delay policy easing if officials fear second-round effects on wages and expectations.

European economies appear particularly exposed. Euro has already underperformed this week, and the prospect of renewed trade friction adds to existing growth and political challenges across the region. Markets appear to be assigning a modest but growing probability to escalation.

For now, tariffs remain a tail risk rather than a base case. Still, the willingness to openly weaponize trade policy introduces uncertainty that is difficult for central banks to ignore. In that sense, Greenland has become more than a geopolitical talking point. It has evolved into a potential inflation channel, reinforcing the case for caution in pricing aggressive Fed rate cuts.

US 10-Year Yield Breaks 4.2% as Bullish Reversal Builds

One of the most consequential technical developments of the week was the decisive break higher in the US 10-year yield. The late-week selloff in Treasuries pushed yields firmly above the 4.2% level, a zone that had acted as both technical resistance and a psychological ceiling in recent months.

The break is technically significant. The move cleared 38.2% retracement of 4.629 to 3.947 at 4.207, suggesting that the entire decline from last year’s peak has completed. As long as 55 D EMA (now around 4.140) holds, further upside is favored. The next key target lies at 61.8% retracement of 4.368. Sustained momentum toward that level would confirm that the rebound is more than corrective.

Zooming out to the medium-term structure, price action since 4.997 (2023 high) continues to be viewed a broad consolidation pattern. 10-year yield remain well supported above 38.2% retracement of 0.398 (2020 low) to 4.997 at 3.240, keeping the secular uptrend intact.

One interpretation is that the three-wave corrective decline from 4.809 (2025 high) has ended at 3.947. If that view holds, the current advance would represent the start of a new impulsive leg higher for retest of 4.809. A break beyond that level would reopen the path toward the 2023 high at 4.997. Sustained trading above 55 W EMA (now near 4.211) would further reinforce this bullish case.

Dollar Lags Yield Breakout, Awaits Equity Signal

Despite the sharp rise in US yields last week, Dollar Index posted only modest gain. One explanation lies in resilient risk sentiment. US equities continued to absorb higher yields without major stress, reducing the need for defensive Dollar positioning. As long as stocks remain firm, Dollar’s upside from yield differentials alone appears constrained.

Technically, rise from 97.73 in Dollar Index is seen as the third leg of the corrective pattern from 96.21 (2024 low). Further rise is expected as long as 55 D EMA (now at 98.82) holds, to 100.39 resistance and above.

But strong resistance is expected from 38.2% retracement of 110.17 to 96.21 at 101.54 to limit upside to complete the corrective bounce. Nevertheless, this view is subject to change if there is notable pickup in upside momentum. So D MACD will be monitored closely ahead.

So far, US stocks have shown little concern over higher yields, tariff rhetoric, or Fed credibility risks. Outlook remains bullish, but there is risk of a pullback ahead.

For DOW, the key lies in 50,000 psychological level, which is just a few hundred points away. Break of 48,792.34 near term support will indicate first rejection by 50k, and bring pullback to 55 D EMA (now at 48,032.00), or below. However, decisive break of 50k will pave the way to 100% projection of 41,981.14 to 48,431.57 from 45,728.93 at 52,179.36, probably within Q1. In such development, there would be little chance for Dollar Index to stage a near term bullish trend reversal.

NASDAQ is clearly lagging behind other major indexes as it’s still capped below the record high of 24,020.00 set back in October. On the downside, break of 23110.20 support would argue that the corrective pattern from 24,020.00 has started the third leg, and would target 21,898.28 support and below. In this case, there would be corresponding pullback in DOW, which together should give Dollar Index a lift. However, decisive break of 24,020.00 will resume the long term up trend and indicate that full-fledge risk-on markets are back.

EUR/USD Weekly Outlook

EUR/USD’s fall from 1.1807 continued last week and the development solidifies that it’s in the third leg of the corrective pattern from 1.1917. Initial bias stays on the downside this week for 1.1467 and below. For now, risk will stay on the downside as long as 1.1698 resistance hods, in case of recovery.

In the bigger picture, as long as 55 W EMA (now at 1.1413) holds, up trend from 0.9534 (2022 low) is still in favor to continue. Decisive break of 1.2 key psychological level will carry larger bullish implication. However, sustained trading below 55 W EMA will argue that rise from 0.9534 has completed as a three wave corrective bounce, and keep long term outlook bearish.

In the long term picture, 38.2% retracement of 1.6039 to 0.9534 at 1.2019, which is close to 1.2000 psychological level is the key for the outlook. Rejection by this level will keep the multi decade down trend from 1.6039 (2008 high) intact, and keep outlook neutral at best. However, decisive break of 1.2000/19, will suggest long term bullish trend reversal, and target 61.8% retracement at 1.3554.