FX Markets: Trade Tensions Resurface as Tariff Risks Weigh on the Dollar.

USD – Under pressure after fresh trade tensions with Europe; volatility rising as tariff risks return.

EUR – Benefiting from the softer dollar in the near term, but upside capped by trade uncertainty.

GBP – Firmer against USD but lagging the euro; domestic data and BoE expectations remain a headwind.

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USD:

The dollar opened the week on the back foot after President Trump escalated tensions with Europe over Greenland, threatening 10% tariffs, rising to 25% in June, on eight European countries including the UK, France, Germany, and Denmark. The move was taken as a red line in Europe, with UK Prime Minister Starmer publicly criticising the stance and France’s President Macron calling for the possible use of the EU’s Anti-Coercion Instrument.

The EU is reportedly considering €93bn in retaliatory tariffs, raising the risk of further volatility in FX markets. Attention now turns to Trump’s speech at Davos on Wednesday, alongside US core PCE inflation data on Thursday and PMI releases on Friday, which will shape expectations for the dollar near term.

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EUR:

The euro has benefitted from this morning’s flight from the dollar, with EUR/USD around 0.4% higher than Friday’s lows. However, renewed US tariff threats present a clear downside risk for the eurozone economy, particularly if trade tensions escalate further.

For European FX, the dominant themes this week are Davos headlines, developments around Greenland and tariffs, and Friday’s PMI data, which will provide an updated read on growth momentum.

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GBP:

This week is about setting expectations ahead of the Bank of England’s rate decision in early February. Sterling has gained against the softer dollar but is underperforming the euro.

Key UK releases include wage growth and payrolls data tomorrow, followed by CPI inflation on Wednesday. Another 20k decline in employment is expected for December, while inflation is forecast to tick up from 3.2% to 3.3% — an unhelpful mix for the Bank of England and one that may limit upside in the pound.

Economic Calendar