Geopolitical tensions tested by solid macroeconomic backdrop
Geopolitical developments, not least the escalating Greenland debate, have taken centre stage amidst a solid macroeconomic backdrop at the beginning of 2026. US data releases suggest a cooling yet stabilizing labour market, with price pressures relatively contained. Risk sentiment has been positive, supported by continued strong earnings, with a rotation from tech into more traditional cyclical sectors. While short-end rates have remained stable, rising term premiums have driven a steepening of the US yield curve. Concerns over Fed independence have re-emerged, as the Department of Justice issued grand jury subpoenas to the Fed. This, however, seems to have proven an implicit relief for markets due to the subsequent push back from Republican lawmakers in the Senate making it more difficult for Trump to nominate a new Fed Chair. Oil prices have climbed on the risk of US intervention in Iran. In Japan, the announcement of a snap election is weighing on the Yen as PM Takaichi appears likely to advance her pro-stimulus agenda. This has also led to significant upward pressure on long-ed Japanese yields, with spillover effect on global bond markets.
The FX market has shown limited directional movement over the past month, largely driven by seasonal rebalancing flows. EUR/USD has edged marginally lower, trading in the 1.16-1.17 range, underpinned by broad USD strength. However, market focus this week has pivoted to the "Sell US" narrative, with global investors reducing exposure to US assets in response to the Trump administration's tariff threats linked to the Greenland issue. Meanwhile, risk-sensitive Scandies have emerged as G10 top performers. Following a weak end to 2025, NOK has rebounded strongly in January, driven by seasonal patterns amplified by rising oil prices. EUR/SEK has benefited from risk sentiment and Swedish macro tailwinds. JPY has weakened significantly, pushing USD/JPY above 158. Finally, EUR/DKK is trading near the 7.47-level, close to historical intervention levels, reflecting ample DKK liquidity rather than geopolitics related to Greenland.
Outlook: Positive on EUR/USD and EUR/Scandies
In the near term, we view the balance of risks for EUR/USD as relatively neutral. Over the medium term, we maintain our outlook for EUR/USD to trend higher, underpinned by narrowing real rate differentials, a recovering European asset market, reduced global demand for restrictive monetary policy, persistent tailwinds from hedge ratio adjustments, and fading confidence in US institutions. For EUR/SEK, domestic factors like the brighter growth outlook and relative monetary policy have turned slightly positive for the Swedish krona. For EUR/NOK, we still believe the trend trajectory is higher, driven by unit labour costs divergence - but we highlight that volatility around this trend is likely to be considerable.
Risks to our forecasts are predominantly tied to the US outlook. If the capital rotation out of US assets continues and a sharp US recession hit, EUR/USD could break substantially higher than our forecast suggests. In this environment, commodity currencies would also face a larger hit. Conversely, persistent resilient US data and/or renewed euro area weakness that could prompt the ECB to cut again this year could keep the USD stronger-for-longer. We highlight that a stagflationary shock to the US economy might not necessarily be positive for the USD. Finally, we will closely monitor geopolitical events and any signs that the global cycle is turning.
Author
Danske Research Team
Danske Bank A/S
Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.
