European Tariff Threats Take a Turn at Davos Forum; U.S. Greenland Grab Still Sways Euro Trends

TradingKey - Europe's tariff threats took a dramatic turn at the Davos forum, while also adding EUR/USD more uncertainty to its movement. On January 17, Trump declared he would impose 10% tariffs on European countries, while EU lawmakers explicitly stated they would suspend approval of the US-EU trade agreement reached with the Trump administration in July 2025.

Conflicts between Europe and the US may continue to escalate, potentially putting more pressure on the Euro exchange rate. In the short term, geopolitical risks may continue to suppress the Euro's performance; furthermore, with the Eurozone's economic growth outlook remaining pessimistic, its monetary policy will likely continue to shift toward easing, which is unfavorable for the EUR/USD pair.

Tariff Crisis Eases but Greenland Issue Remains Unresolved

Last week, US-Europe trade tensions were reignited, but a "dramatic twist" occurred in Davos. After meeting with the NATO Secretary General, Trump announced that due to a framework agreement reached on the Greenland issue, the European tariffs scheduled to take effect on February 1 would be canceled. Goods exported to the US from eight countries, including Denmark, Germany, and France, will be exempt from the 10% additional tariffs.

Trump's remarks eased market tensions, leading to a rebound in US and European equity markets, while EUR/USD retraced from its previous sharp rally, failing to break through the 1.1750 resistance level.

As a president with a business background, Trump’s "transactional diplomacy" has remained unchanged. This compromise was merely in exchange for mineral rights in Greenland and cooperation on the "Golden Dome" missile defense system; Europe still faces various pressures from the United States.

ECB President Christine Lagarde once stated that the uncertainty caused by Trump’s policy reversals harms the economy far more than the tariffs themselves, and export-oriented economies like Germany are highly dependent on the US. Continued geopolitical maneuvering will keep disturbing the Euro's trajectory.

Whether economically or militarily, Europe remains overly dependent on the US, making its countermeasures against US pressure appear weak. Europe holds a massive amount of US financial assets, with direct holdings of approximately $8 trillion and a total of $12.6 trillion when including managed funds. There was brief market speculation about whether Europe would use its $12.6 trillion in US financial assets to shock the dollar.

However, these assets are mostly held disparately by private institutions, making it impossible for official bodies to form a cohesive sell-off force. US Treasury Secretary Bessent even remarked that Denmark's $100 million reduction in US Treasury holdings was "insignificant," further weakening Europe's negotiating leverage. Consequently, it is difficult for the Euro to gain sustained support from geopolitical events.

Central Bank Rate Paths in the US and Europe to Determine Euro Direction

The medium-to-long-term trend of EUR/USD remains inextricably linked to the policy divergence between the Fed and the ECB. Current market expectations for rate cuts by the two central banks have diverged sharply, becoming the core driver of exchange rate volatility.

Weak economic growth in the Eurozone has increased investor bets that the ECB will maintain accommodative monetary policy. Conversely, US inflation remains high, and the labor market shows resilience; the Fed's pace of rate cuts in 2026 may slow down, with the interest rate differential logic continuing to weigh on the Euro.

Economic growth in the Eurozone is sluggish. Data shows the Eurozone Composite PMI fell from 52.8 to 51.9, with momentum in both manufacturing and services weakening simultaneously. The 2026 growth forecast, excluding Ireland, is only 1.0%, significantly lower than the resilience shown by the US economy. Although Lagarde sent hawkish signals, stating that current interest rates are appropriate for fundamentals, the market doubts policy sustainability. Morgan Stanley predicts the ECB may cut rates by 25 basis points each in June and September.

Strong economic growth momentum and persistently stubborn inflation data are reshaping market expectations for the Federal Reserve's monetary policy path. The Fed may keep interest rates unchanged at next week's meeting, and the probability of a rate cut this quarter has significantly decreased.

Jeremy Schwartz, Senior US Economist at Nomura Securities, stated that while the surface-level economic outlook suggests the Fed should wait and see—and might even put rate hikes back on the table later this year or next—in practice, the Fed is likely to remain on hold until Powell's term ends in May.

Weak Euro Rebound: Volatile Downward Trend May Become the Main Theme

Recent positive data from the Eurozone is unlikely to reverse the structural decline. Data released by Eurostat on January 19 showed that the Eurozone's annual inflation rate in December 2025 fell to 1.9% from 2.1% in November, lower than the preliminary forecast of 2%. Additionally, industrial production in November grew by 2.5% year-on-year, exceeding market expectations. However, recent economic data represents short-term fluctuations that cannot change the overall pattern of sluggish economic recovery.

S&P Global data shows that the Eurozone Manufacturing PMI has previously fallen below the boom-bust line, and recovery momentum in the services sector is also weakening. Improvement in isolated data points is insufficient to push the Euro through key resistance levels.

From a technical perspective, EUR/USD has been in a downward channel since late December last year. Although it recently stopped falling and staged a rebound—breaking above the downward channel and finding support at 1.1580—the pair could retest this support if US economic data remains positive and the Fed maintains a hawkish stance. If the ECB releases more dovish signals, it might even test the 1.15 psychological level.