A new year, but it seems the same story as we begin 2026 with the threat of more tariffs. The ongoing saga over a fresh trade war in 2026 shows no signs of stopping. 

Markets have already shown signs of turmoil and volatility in response to Donald Trump’s latest announcements, so what does this mean for the overall picture as we begin the new year? 

Europe walked out of last year’s conflict relatively unscathed in terms of tariff talk. But now that the focus has shifted to the European bloc, it could be time for traders to look back at how events unfolded and how the markets were affected.  
 

History Repeating Itself

As we witnessed in April of last year, the tariff shock introduced massive uncertainty regarding trade flows, inflation, supply chains, and the lasting effects on corporate earnings.  

Major U.S. stocks fell sharply, and all three major indices dropped by close to 5% in a single session. Losses were large enough to wipe out trillions of dollars.  

Speaking of the Dollar, it weakened significantly across the board, with its main competitors taking advantage of an indecisive market. In addition, the dollar index fell to multi-month lows, as traders saw a sell-off not witnessed since the 2020 pandemic.  
 

Did the Tariffs Continue?

Some tariffs are still active but have been reduced or negotiated. The initial tariffs imposed on China, for example, were set at over 100%, one of the steepest tariff increases in modern history.  

China to hit back hard. Retaliating with its own levies and halting supplies to the U.S. industry, forcing the closure of production lines. In turn, the markets pulled back, and Donald Trump retracted. 
 

So, what’s new this time around?

President Trump’s focus shifted to European Countries after they opposed the takeover of the Danish territory of Greenland. European markets fell after the news that Trump would slap a 10% tariff on a host of countries, including the UK, France and Germany. 

UK Prime Minister Keir Starmer, along with many other world leaders, said the plan to impose tariffs on the UK and other countries that oppose his plan to take over Greenland is completely wrong. 

However, at the World Economic Forum in Davos, Trump announced that he changed his mind. He retracted his threat to impose a 10% tariff and abandoned talks to take control of Greenland. 
 

(Click on image to enlarge)

The initial tariff threat dropped the Dax from its record peak, before prices bounced back 
 

Why the sudden change of heart?

With so many NATO countries standing up against the President, and with the possibility of breaking years of tight relationships, foreign and domestic, there was a shift in sentiment.  

In addition, the U.S. would not escape consequences. Additional border taxes on imports would be paid by businesses and consumers in America, hitting activity and investment, and possibly heightening inflation. 
 

Where would this leave the Dollar?

We spoke about history repeating itself, and the markets painted a similar picture. Forex pairs all advanced against the greenback at the time of the initial announcement, with the euro adding almost 200 pips in value against its main competitor.   

But with Donald Trump somewhat backing down on his 2025 tariffs, there was a sense that this was just a threat, as the dollar recouped most of last year’s losses. 
 

What’s next?

It wasn’t exactly a victory for NATO, as many believe this isn’t the end of the story. Trump wants a greater presence in the Arctic seas and along their emerging routes, as he sees them as strategically important.  

If this progresses, economists warn that tensions could hit business investment, shake up consumer confidence, and trigger a deeper sell-off in financial markets.  

The only saving grace for stocks is the AI and tech mania that has been in full focus for the past 12 months. As the earnings season approaches, it will be a delicate time for big tech firms to show off their forecasts for this year, as with every record, there can be a correction. 

Fears that AI stocks are fuelling a market bubble, a correction could rapidly turn into a crash. Let’s see how the 2026 tariff war plays out and if there is a light at the end of the tunnel.

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