Greenland tariffs and Japan’s snap elections in focus

I was travelling for the best part of last week and, although I kept my eye on event risk, the past fortnight has delivered far more drama than I – and my colleagues – had anticipated.

From the US capture of Venezuelan President Nicolás Maduro, the US government issuing subpoenas against the Fed, to Trump recently announcing a fresh batch of 10% tariffs across major European countries to come into effect on 1 February over his dispute regarding Greenland, we have certainly started the year running.

With tariffs expected across Denmark, Norway, Sweden, France, Germany, the UK, the Netherlands, and Finland, Trump has also stated that if his demands are not met – the total purchase of Greenland – these levies will increase to 25% on 1 June. However, I doubt it will come to this.

If Trump were to pursue military action to acquire Greenland – very unlikely, in my opinion – the response from Greenland and Denmark would be limited and they would likely rely on NATO. An incursion would also undermine trust in the alliance. Remember, markets hate uncertainty, and there is little modern precedent for such a situation. Trade would naturally suffer, and energy prices will rise amid supply chain concerns, triggering market panic. You can expect broad risk-off environment, with the greenback trading on the ropes and bonds bought. The EUR would also take a sizeable hit, and safe-havens will rally.

Key US benchmarks remained closed in observance of Martin Luther King Day yesterday. However, global Stocks traded risk-off overnight in Asia, following European markets, which ended Monday’s session in the red across the board. As you would expect, havens also caught a bid, sending Gold and Silver to fresh pinnacles, with the JPY and CHF attracting demand. Nevertheless, the USD softened despite the flight-to-quality dynamic, suggesting the move is more about the market questioning the buck's attractiveness as a safe haven.

Snap elections in Japan

In other news, Japan is heading to the polls on 8 February following PM Sanae Takaichi's announcement of a snap lower-house election – less than half a year in office. This has underpinned JGB yields in recent trading, with longer-dated yields reaching their highest level on record, an attractive play for domestic and foreign investors. The recent 20-year JGB auction also experienced soft demand, sending yields higher.

The JPY has also continued to soften, now within touching distance of 2024 highs versus the USD. I continue to closely watch the USD/JPY pair, as a breakout beyond monthly resistance around ¥160.20 could prompt follow-through breakout buying to as far north as ¥164.50, resistance extended from as far back as 1986!

The BoJ will meet on Friday, holding its first policy meeting this year, and is expected to see the central bank keep its interest rate on hold at 0.75%. However, the bank faces a delicate balancing act: both the government and the BoJ are concerned about JPY depreciation, yet the central bank wishes to avoid rate hikes that appear driven primarily by currency considerations.

Canadian CPI mixed, leaving rate expectations unchanged – Eyes on UK jobs numbers today

The macro space welcomed the December Canadian CPI inflation yesterday, a mixed bag which saw headline accelerate and core measures ease. Headline YY CPI inflation rose by 2.4%, bettering the median estimate and accelerating from November’s 2.2%. The rise was largely underpinned by a temporary tax break between December 2024 and February 2025 on certain goods, therefore base year effects increased price pressures in December 2025.

The BoC’s preferred measures – CPI trim and median – eased on a YY basis to 2.5% (from 2.8%) and 2.7% (from 2.9%), respectively, which should see the central bank remain on hold for the foreseeable future. Rate pricing and the CAD were largely unmoved following the inflation print, with markets still pricing in around 11 bps of hikes until the year-end.

The day ahead focusses on the November UK jobs figures at 7:00 am GMT, followed by the December UK inflation report on Wednesday, public sector net borrowing on Thursday, and then retail sales data on Friday. CPI numbers, of course, will be the highlight, though jobs data should still be watched closely. Unemployment is expected to remain unchanged at 5.1%, with wage growth anticipated to ease, emphasising a softening jobs market.

With markets only pricing in just two rate cuts this year in the BoE bank rate (-42 bps), a miss in the UK data would likely offer traders more bang for their buck in terms of downside for the GBP, triggering money markets to fully price in two cuts and more from the central bank. My rationale is that disappointing numbers would emphasise concerns about growth and the fiscal situation in the UK.

Positioning in the GBP also remains somewhat stretched to the upside – check the strength of the GBP versus G10 peers, for example – therefore, a downside surprise in data could see traders unwind long positions. Any upside surprise in wage growth would complicate the Bank of England's plans for further rate cuts, potentially supporting the GBP in the short term.

That’s it from me today. Tomorrow will be eventful, with traders honing in on the December UK CPI inflation numbers ahead of the European cash open, with attention then shifting to US President Trump’s widely anticipated speech at the WEF annual meeting.