Dow Jones & Nasdaq 100: Powell Investigation Jolts US Futures Overnight

US stock futures slide in early trading on Monday, January 12, as traders react to reports of the US Department of Justice launching a criminal investigation into the Fed.

Last week’s US Services PMI and jobs report cooled bets on a March Fed rate cut, intensifying the Trump administration-Fed stand-off. Fed Chair Powell confirmed reports of a criminal investigation ahead of Monday’s opening bell.

Meanwhile, falling 10-year Japanese Government Bond (JGB) yields and a weaker Japanese yen cushioned the downside. 10-year JGB yields have pulled back from the January 6 high of 2.138%, their highest level since 1999, bolstering yen carry trades into risk assets.

Despite the morning pullback, optimism about the earnings season, eventual Fed rate cuts, and a robust US economy support a bullish medium-term outlook for US equity futures.

Below, I’ll outline the key market drivers, the medium-term outlook, and the key technical levels traders should watch.

Japan Political Risk Triggers Yen Sell-Off

USD/JPY climbed to a high of 158.206 in morning trading on January 12, its highest level since January 2025. Reports of Prime Minister Sanae Takaichi considering a snap election fueled political uncertainty, weakening demand for the yen.

Prime Minister Takaichi enjoys strong public approval ratings, which could give Takaichi and the Liberal Democratic Party greater control over the coalition, enabling her to achieve her fiscal policy goals.

For context, USD/JPY rallied from 147.056 to a high of 153.274 in response to Takaichi becoming the LDP leader in 2025, underscoring market sentiment toward her support for loose monetary policy and fiscal stimulus. Since becoming Japan’s first woman prime minister, her comments and fiscal policy measures have sent USD/JPY to 158.

Takaichi’s policies, a cautious BoJ, and a more hawkish Fed policy stance have sent USD/JPY higher, fueling yen carry trades into US dollar assets.

DOJ Criminal Investigation into the Fed Hits Risk Appetite

Fed Chair Powell announced the US Department of Justice opened a criminal investigation into the Fed on Sunday, January 11, weighing on US stock futures. In a video message, Fed Chair Powell stated:

“This unprecedented action should be seen in the broader context of the administration’s threats and ongoing pressure. This new threat is not about my testimony last June or about the renovation of the Federal Reserve buildings; it is not about Congress’s oversight role. […] 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.”

Powell emphasized the significance of the criminal charges, stating:

“This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions or whether instead, monetary policy will be directed by political pressure or intimidation.”

Fed Speakers in Focus as US Inflation Data Looms

US futures posted heavy losses during the Asian morning session on Monday, January 12, reversing gains from the previous session as the news of the criminal investigation weighed on sentiment.

The Nasdaq 100 E-mini and the S&P 500 E-mini slid 202 points and 34 points, respectively, while the Dow Jones E-mini fell 204 points.

Later Monday, Fed speakers will be in focus following Fed Chair Powell’s announcement. Fed calls to delay Fed rate cuts following December’s stronger-than-expected jobs report and January’s ISM Services PMI would weigh on US equity futures. Market reaction to Powell’s announcement is likely to continue weighing on risk sentiment.

There are no US economic reports for markets to consider ahead of tomorrow’s CPI report, which is likely to influence the Fed rate path and risk appetite.

Economists forecast the US annual inflation rate will remain at 2.7% in December after cooling from 3% in September. There was no October report because of the US government shutdown. Softer inflation supports a more dovish Fed rate path, typically lowering borrowing costs. Lower borrowing costs boost corporate profits and equity valuations.

Meanwhile, corporate earnings will also influence market trends. JPMorgan Chase (JPM) will kick-start the earnings season on January 13.

Despite the morning losses, optimism over corporate earnings and hopes for an H1 2026 Fed rate cut support the cautiously bullish near-term and bullish medium-term price outlook.

Key Technical Levels for Dow Jones, Nasdaq 100, and S&P 500

Despite the morning reversal, the Dow Jones E-mini, the Nasdaq 100 E-mini, and the S&P 500 E-mini remained above their 50-day and 200-day EMAs. The EMAs signaled a bullish short- to medium-term outlook, aligning with positive fundamentals.

Near-term trends will hinge on geopolitical developments, US economic data, corporate earnings, and Fed rhetoric. Key levels to monitor include:

Dow Jones

• Resistance: the January 7 record high of 49,876, and then 50,000.
• Support: 49,000 followed by the 50-day EMA (48,121).

Nasdaq 100

• Resistance: 26,000 followed by the October 30 record high of 26,399.
• Support: the 50-day EMA (25,416) and then 24,500.

S&P 500

• Resistance: the January 9 high of 7,018, followed by 7,500.
• Support: the 50-day EMA (6,855) and then 6,500.

Bullish Medium-Term Outlook: US Inflation, Earnings, and the Fed

In my opinion, the short-term price outlook remains cautiously bullish amid hopes for an H1 2026 Fed rate cut and robust corporate earnings. These fundamentals align with constructive technicals. Furthermore, expectations that the incoming Fed Chair will be willing to accept elevated inflation and lower interest rates reaffirm the constructive medium-term bias.

However, several events would derail the bullish medium-term outlook, including:

• The Bank of Japan announces a hawkish neutral interest rate (1.5%-2.5%), indicating a narrower US-Japan rate differential. Typically, sharply narrower differentials trigger a yen carry trade unwind.
• Strong US inflation data and hawkish Fed rhetoric would dampen bets on a Fed rate cut.
• Corporate earnings disappoint.
• Geopolitical tensions escalate.

Conclusion: Bullish Outlook Intact

In summary, a robust US economy, a dovish Fed rate path, AI-related earnings, and a dovish BoJ neutral rate are key. These scenarios reinforce a cautiously positive short-term and a bullish medium-term outlook for US stock futures.

However, traders should monitor 10-year JGB yields, USD/JPY trends, and the Nikkei 225. Their trends reflect yen carry trade flows and the liquidity backdrop. Threats of a yen intervention and hawkish BoJ guidance may fuel concerns about a yen carry trade unwind. Key levels to watch include a USD/JPY drop below 150 and 10-year JGB yields climbing to new highs. These levels would likely send the Nikkei 225 lower, weighing on buyer appetite for US risk assets.

Despite expectations of BoJ hikes, US stock futures are likely to target new highs. Corporate earnings and the Fed are likely to be the key price catalysts.

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