The unthinkable would be if Donald Trump used military force to take over Greenland. This is something he stayed silent on when pressed by NBC. 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. Interestingly, the EUR/USD has also rallied, despite threads of more tariffs for European exports. Unless Trump backs down, the EUR/USD forecast is likely to remain positive as investors are again using the 2025 playbook i.e., the “Sell America” trade.
Dollar falls as investors shun risk
Washington raised the stakes over the weekend in its 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. Gold has maintained much of its overnight gains, Germany’s DAX and other European indices are lower by around 1-2 percent, along with US index futures.
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. Some volatility into what has otherwise been a relatively benign backdrop has been injected in the FX markets.
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.
Euro shrugs off concerns for now
The renewed tensions over Greenland and the threat of fresh tariffs are unhelpful for 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 fall out 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.
Technical EUR/USD forecast and key levels to watch
The EUR/USD has found good support from the support trend of its bearish channel, which needs to break to signal a turn in the tide. The resistance of the channel comes in around 1.1650 to 1.1660 area, with a potential break opening the door towards the 1.1700 region. Support is seen at 1.1600 followed by 1.1580 and then 1.1500.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
