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All eyes are on Trump today when he speaks at Davos, and ahead of it things calmed down ever so slightly overnight, before index futures resumed lower once Europe got underway. Things could get messy again and the US dollar could come under renewed pressure, if Trump doesn’t decide to dial down days of escalating tensions with Europe over Greenland. The European leaders are meanwhile exploring possible retaliation measures after Trump threatened to impose tariffs on countries opposing his ambitions to acquire Greenland, a move that has rattled both investors and long-standing allies. European leaders appear to be hardening their stance. Germany has warned that Trump has crossed a red line, while the European Union is reportedly discussing retaliatory tariffs on up to €93bn of US goods.
 

Risk sentiment remains downbeat

Risk sentiment has deteriorated sharply, in recent days and safe haven flows into precious metals have been evident with prices surging to fresh record highs. Interestingly, the EUR/USD exchange rate has also rallied during this risk-off phase (before easing a little this morning), despite threats of more tariffs for European exports. This is a clear sign as investors are again using the 2025 playbook i.e., the “Sell America” trade.

The unthinkable would be if Donald Trump used military force to take over Greenland. This is something he stayed silent on when pressed by journalists yesterday. But his desire to annex Greenland could re-ignite another trade war, which is equally damaging for markets. So far, the reaction to the weekend announcement of tariffs on several European countries has been a risk-off one, where equities, cryptos and the dollar have all been sold in favour of the safe-haven gold and silver, and the likes of the Swiss franc.
 

Dollar still under pressure as investors shun risk

Trump raised the stakes over the weekend in his pursuit of Greenland. The threat of tariffs rising from 10% to 25% on eight European nations appears consistent with the administration’s ‘maximum pressure’ strategy. Investors are now wondering whether this marks the end of Europe’s relatively accommodating approach to the US, and whether the EU’s Anti-Coercion Instrument, a trade mechanism that targets taxes, tariffs and investment restrictions against coercive states, will be employed. This issue, along with the risk of fractures within NATO, is likely to dominate the policy agenda this week, overshadowing what would otherwise have been a Ukraine-focused discussion.

For now, markets have reacted cautiously negative to the weekend headlines.  Investors are familiar with the so-called TACO trade, where similar episodes in the past have often proven more rhetorical than substantive, with diplomacy eventually calming nerves. Investors seem a little reluctant to chase what can quickly become noisy political drama. But take nothing for granted and watch the developments closely. For now, the US dollar index remains under pressure.
 

Euro shrugs off concerns for now

The renewed tensions over Greenland and the threat of fresh tariffs are unhelpful for the European economy, yet this hasn’t hurt the euro today – at least not against the dollar. We have seen the single currency weaken against some of the other currencies, but there, too, the losses have been mild. It looks like investors are confident that European firms have adapted to last year’s tariff volatility, so the potential fallout could be minimal. The fact that the ‘Sell America’ trade has emerged is also helping the EUR/USD, with the latter growing increasingly to become a safe haven currency in favour of the Japanese yen and potentially the US dollar.
 

Don’t forget about the Fed

Let’s not forget about the Fed, meanwhile, where the key question remains over who will replace the Chairman Jerome Powell. The dollar firmed on Friday after reports that Kevin Hassett would remain at the National Economic Council, while Kevin Warsh was now seen as the leading candidate for the Fed role, which would be mildly supportive for the dollar if confirmed. Obviously, it looks like politics is likely to overshadow US data this week, with the dollar potentially probing lower levels, keeping the EUR/USD forecast tilted to the upside.
 

EUR/USD technical analysis and key levels to watch
 

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The EUR/USD has found good support from the 200-day moving average this week near 1.1580-1.1600 area. The fact that the resistance of the short-term bear channel has also been taken out, this is also a bullish sign. Price now needs to come out of the larger triangle pattern to signal a more meaningful change in direction. The resistance trend of this pattern comes in around 1.1760 area, which was tested yesterday. A clean break above here would initially target 1.1800, followed by 1.1850 and finally the September 2025 high of 1.1919. Support, meanwhile, comes in around 1.1700 region initially. Below that, the 1.1625 to 1.1660 area, is the next key zone to watch.

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