FX daily: Greenland pressure risks Dollar blowback

Not many analysts had the US invading Greenland at the top of their 2026 market outlooks. The weekend tariff move from President Trump has seen gold rallying 2%, equities off 1.0-1.5%, and the dollar under a little pressure. This week's World Economic Forum in Davos will be the venue for much US-European diplomacy and more FX volatility.

USD: A little early for the 'Sell America' story

The weekend saw Washington up the ante in its pursuit of Greenland. The threat of 10% rising to 25% tariffs on eight European nations looks part of Washington's 'maximum pressure' playbook to secure a deal. Many political commentators are writing that this will prompt the end of the EU's appeasement policy towards the US. France seems to be at the forefront of recommending the use of the EU's Anti-Coercion Instrument – a trade tool targeting taxes, tariffs and investment limits on countries trying to coerce the EU.

This topic and the threat of a NATO split look set to dominate the policy agenda in a week which otherwise would have seen heavy focus on Ukraine. US President Donald Trump is due to speak at Davos on Wednesday, while EU leaders are set to meet a day later. The question will be whether European leaders will follow China's playbook from last year – matching US tariffs one-for-one – to ultimately prompt a Washington climb-down.

The initial market reaction to the weekend events has seen gold gap 2% higher, German Dax futures marked 1.5% lower, and the dollar slightly weaker. US markets are closed for the Martin Luther King public holiday, but S&P futures appear to be off around 0.8%. It is probably a little too early to be dusting off the 'Sell America' theme, where Washington's pursuit of Greenland, like the near 50% Liberation Day tariffs last April, is seen as a spectacular own-goal. Certainly, investors seem very wary of chasing themes like these, which typically look like noisy rhetoric before diplomacy plays out.

Nonetheless, these developments will add some volatility in an otherwise benign/calm investment environment. On the subject of 'Sell-America', we wrote on Friday that there was very little evidence of 'de-dollarisation' last year. Even if events were to severely escalate, it looks unlikely we would see the kind of 10% dollar sell-off witnessed last year, when the buy-side was exceptionally FX underhedged in its US exposure.

Away from Greenland, this week could possibly see President Trump announce his pick to replace Jerome Powell as Federal Reserve Chair. The dollar rallied on Friday when it emerged that the President wanted Kevin Hassett to stay at the National Economic Council, and Kevin Warsh is now seen as the frontrunner – a mild dollar positive if confirmed.

Expect US data to take a back seat to politics this week, and expect the dollar to try exploring the downside. Gap resistance at 99.35 might now limit the topside for DXY, and a correction back to the 98.80/85 area is the mild bias.

EUR: Unwelcome developments

The flare-up over Greenland and the threat of renewed tariffs are very unwelcome for European industry. This comes at a time when industrial sentiment has finally started to rise, with businesses seemingly having learnt to live with last year's tariff volatility. These developments will focus European minds on the need to generate domestic demand and potentially even push through sluggish reforms such as the Savings and Investment Union, to allow Europe's capital markets to better compete with those of the US.

EUR/USD has found support under 1.1600. Key intraday resistance is seen at 1.1650, above which 1.1690/1700 is possible. One-week and one-month EUR/USD traded volatility have been marked as a little higher, which is understandable given this week's uncertainty.

GBP: Looking for some outperformance this week

We think this week's UK data set – November jobs data and December CPI – could prove slightly bullish for sterling and extend a short squeeze which has been extending since late November. We had felt that the weak link here would be EUR/GBP, with risks to 0.8600. However, dollar weakness at the start of the week could mean that GBP/USD sees the majority of this move. Above 1.3415/3420 could open up the 1.3450/3460 area.

We are cognisant that sterling tends to underperform in major risk-off episodes; clearly, there are many moving parts at play here.

CEE: More weakness for FX with central banks' dovish shift

This week in the region, we start with the meeting of the National Bank of Romania, which is expected to leave rates unchanged at 6.50%. Inflation has stabilised slightly below 10% year-on-year recently, and the fiscal outlook looks better than consensus expected – but the central bank will want to wait for signs of a decline in inflation in the coming months. Therefore, we expect a return to rate cuts by May, but FX implieds do not really price any easing at this point.

The Central Bank of Turkey meets on Thursday and is likely to cut rates by 150bp again to 36.50%. Lower-than-expected inflation in December and record-high FX reserves should allow the central bank to continue its cutting cycle at the same pace as in December. However, the risk is in the direction of a smaller rate cut.

In Poland, wage figures will be published on Thursday, which the central bank governor mentioned last week as an important indicator for further rate cuts. We will also see industrial production and PPI in the second half of the week. Later this week, we could also hear the first statements from the Czech National Bank board before the blackout begins later next week.

EUR/PLN closed last week at 4.220, our target from the previous days, and we see 4.220-230 as the new range for now. We also maintain our bearish view on the koruna and forint, where we see central banks getting closer to restarting rate cuts. EUR/CZK should therefore head towards 24.350-400, where we maintain our view from last week. EUR/HUF's upside has probably diminished slightly due to the hawkish repricing in recent days, and we now see levels around 386.

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