FX Markets: Trade Tensions Resurface as “Sell America” Narrative Pressures USD.

USD – Volatile and under pressure amid geopolitical uncertainty and renewed trade tensions, with markets rotating away from US assets despite attempts to calm worst-case fears.

EUR – Benefiting in the short term from a renewed “Sell America” narrative and capital rotation out of US assets, though longer-term trade risks remain.

GBP – Losing momentum after soft UK labour market data reinforced expectations for a Bank of England rate cut later this spring.

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USD:

It has been an exceptionally eventful couple of days in financial markets, with the US dollar coming under renewed pressure. EURUSD has risen more than 1.3% since yesterday’s open amid escalating geopolitical and trade tensions. President Trump’s threats to impose tariffs on European allies over Greenland have prompted the EU to prepare a €93bn retaliatory tariff package, reviving concerns around a broader trade conflict.

Some market commentators have even speculated about tail risks such as NATO fragmentation or large-scale divestment of US assets by the EU. These fears were partially eased this morning after Treasury Secretary Scott Bessent stated in Davos that the US remains committed to NATO, pushing back against worst-case scenarios.

Elsewhere, global bond markets are adding to dollar volatility. In Japan, 10-year JGB yields have surged around 25bps this week, putting intense pressure on the yen. Markets are increasingly uneasy about Japan’s fiscal outlook after PM Takaichi pledged to suspend the 8% food tax for two years. With limited US data due today beyond the weekly ADP employment report, geopolitical and cross-market dynamics are likely to remain the dominant drivers for USD.

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EUR:

The euro has rallied strongly this week as the “Sell America” trade appears to be re-emerging. Trump’s renewed tariff threats against the EU have accelerated a rotation out of US assets, benefiting the single currency in the near term.

While a full-scale trade war would ultimately be negative for the eurozone economy, investors are currently focused on relative capital flows rather than long-term growth implications. This mirrors the rotation seen after “Liberation Day” last year, when confidence in US assets briefly wavered.

A ZEW sentiment survey is due later this morning, but it is unlikely to be the main catalyst. For now, EUR performance is being driven more by global positioning and US political risk than by domestic euro-area fundamentals.

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GBP:

Sterling is softer this morning following a weaker-than-expected UK labour market report. The data has capped gains in GBPUSD and weighed more noticeably on GBPEUR.

Private sector ex-bonus wage growth—closely watched for its inflationary implications—slowed from 3.9% to 3.6% in the three months to November. Meanwhile, payrolled employment fell by 43K, more than double the 20K decline expected by markets.

Taken together, the figures reinforce the narrative of a cooling labour market and have encouraged investors to consolidate expectations for another Bank of England rate cut later this spring. Without a clear upside surprise, sterling looks set to remain on the defensive in the near term.

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