USD: Tariff certainty is a myth
Global shocks keep piling up — Venezuela, Iran, Fed independence — and now the Greenland dispute has opened a fresh front. US President Trump has threatened a 10% tariff, rising to 25% in June, on eight key European allies for opposing US control over Greenland. The move effectively torpedoes the US‑EU trade truce agreed only six months ago and has forced Brussels to prepare retaliatory tariffs on €93bn of US goods.
The episode has re‑inflamed NATO tensions, blindsided EU leaders, and ensures Trump dominates the agenda at Davos this Wednesday. It also signals that anyone expecting a calmer second year on trade policy may need to rethink — this is starting to look a lot like last year all over again.
The tariff threat injects another layer of uncertainty into an already crowded geopolitical landscape, raising the risk of a broader risk‑off turn if rhetoric escalates. For markets, the immediate pressure point is Europe: EUR and NOK look most exposed to headline risk, while the Swiss franc looks to be the stand-out winner, acting as a natural hedge against geopolitical stress. European equities — particularly exporters and industrials — face renewed vulnerability. Industrial commodities would likely soften on tariff‑driven demand concerns, while gold and silver stand to benefit if tensions spill over into a wider volatility bid.
De-dollarisation risk resurfaces
The US dollar reaction is likely to remain mixed and relatively contained. A modest bout of USD weakness is logical as markets price a more isolationist US stance, briefly reviving the ‘sell America’ narrative and stirring de‑dollarisation chatter, with the country’s sizeable external liabilities back in focus.
Still, investors have grown increasingly numb to tariff headlines, which tempers the downside, and some investors will likely lean into the ‘TACO trade’ — viewing Trump’s tariff threats as a negotiating tactic rather than a firm policy path — offering the dollar a degree of support. Even so, the latest developments serve as a reminder that the US economy is not immune to the uncertainty generated by Trump’s policy shifts, while lingering concerns over Fed independence — amplified by the delayed nomination of a new chair and the ongoing probe into Jerome Powell — add another layer of caution around the US currency.
EUR: How durable is euro’s resilience?
The euro remains one of the more exposed majors to rising geopolitical risk, with Trump‑era tariff threats adding to the Eurozone’s cyclical vulnerabilities and weakening Europe’s leverage over Russia. Yet, EUR/USD is trading firmly above $1.16 still this morning and is only down against the safe haven Swiss franc.
The euro’s rebound after its early Asian sell‑off is because markets quickly shifted from pricing Europe‑specific pain to broad geopolitical risk, a theme traders had largely ignored going into the weekend. On paper, the tariff announcement is unambiguously negative for the European economy if the White House follows through. But history suggests that prolonged market instability is not something this administration tolerates for long, which is why investors may again treat this as a buy‑the‑dip episode rather than the start of a sustained EUR repricing.
It also helps that the Eurozone is a net global creditor, creating a structural bid for the currency — a stark contrast with the US, which relies on continuous foreign financing to fund its external deficits. That underlying balance‑sheet strength remains a key buffer for EUR even as geopolitical noise intensifies.
However, Europe’s biggest weakness in today’s brutally transactional geopolitics is simple: without energy self‑sufficiency, it doesn’t get a real seat at the table. Power players like Putin, Xi and Trump deal in hard‑currency leverage — oil, gas, metals, critical minerals — and the EU has none of it. China only forced Trump to back down when it weaponised rare‑earth exports; Europe has no equivalent pressure point. If Trump were to throw an LNG export ban into the mix, Brussels’ strategic position would collapse fast — and the EU might have no choice but to fold on the Greenland issue.
It’s notable, too, that EUR/USD has already begun to break from the pattern of Trump’s first term; if it had continued to track that historical analogue, the pair would be trading above $1.20 by now and potentially pushing toward $1.25 into Q1.
GBP: Unclear easing path dampens GBP sensitivity
Sterling has grown more sensitive to USD developments compared with a few months ago, with its price action increasingly defined by moves in the dollar rather than domestic drivers. Feeding into this shift is the BoE’s MPC’s hesitancy to commit to a clearer easing path. With divisions still evident, markets struggle to price a more unified dovish stance, which in turn reduces sterling’s responsiveness to its own data flow.
This dynamic points to subdued price action as the UK heads into a data‑heavy week, with inflation due on Wednesday and the labour market report on Tuesday. One‑week volatility in GBP/EUR and GBP/USD as of Friday – which already captured this week’s data events – remained contained, suggesting markets do not anticipate major moves in GBP crosses. We see a mild pickup this morning driven by heightened geopolitical tensions and elevated expectations for imminent developments, lifting hedging demand beyond what this week’s UK data alone would justify.
In GBP/EUR we see upside risk this week as limited, with a test of resistance at 1.1540/50 unlikely. Tariff tensions are set to keep sterling offered since the UK remains a key target, and entrenched divisions within the MPC should keep data reactions muted unless prints diverge meaningfully from consensus. We expect a move back toward 1.14 instead. For GBP/USD, price action will hinge on how markets interpret the credibility of the new US tariff threats and the EU’s stated commitment to retaliate. Our base case is for the 100‑day moving average at 1.3364 to hold as key support through the week, allowing the pair to consolidate around the 1.34 area.
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Calendar: January 19-23
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
