Europe’s Tariff Threats Take a Turn in Davos; U.S. Greenland Grab Continues to Sway Euro Moves

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

Conflict between the US and Europe may continue to escalate, potentially putting more pressure on the Euro's exchange rate. In the short term, geopolitical risks may continue to weigh on the Euro. Furthermore, economic growth in the Eurozone is not optimistic, and its monetary policy will continue toward easing, which is unfavorable for the EUR/USD trend.

Tariff crisis eases, but Greenland issue remains unresolved.

Last week, US-Europe trade frictions were reignited, but took a "dramatic turn" in Davos. After meeting with the NATO Secretary General, Trump announced the cancellation of European tariff measures scheduled for February 1, as a framework agreement on the Greenland issue was reached. Goods exported to the US from eight countries, including Denmark, Germany, and France, are now exempt from the 10% tariff.

Trump's remarks eased market jitters, causing US and European equities to rebound. EUR/USD, however, retraced from its previous sharp rally, failing to break through the 1.1750 resistance level.

As a businessman-turned-president, Trump's "transactional diplomacy" remains 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 US.

ECB President Christine Lagarde once stated that the uncertainty caused by Trump's policy reversals hurts the economy far more than the tariffs themselves, and export-oriented economies like Germany are highly dependent on the US. Ongoing geopolitical maneuvering will continue to disturb the Euro's direction.

Europe remains overly dependent on the US both economically and militarily, making its countermeasures against US pressure appear weak. Europe holds a massive amount of US financial assets, with direct holdings of about $8 trillion and a total of $12.6 trillion when including managed funds. The market once speculated whether Europe would use its $12.6 trillion in US financial assets to impact the dollar.

However, these assets are mostly held by decentralized private institutions, preventing officials from forming a collective selling force. US Treasury Secretary Bessent stated bluntly that Denmark's $100 million reduction in US Treasury holdings was "insignificant," further weakening Europe's bargaining power. Thus, it is difficult for the Euro to gain sustained support from geopolitical events.

Interest rate paths of US and European central banks to determine Euro's direction.

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

Sluggish economic growth in the Eurozone has increased investor bets on the ECB maintaining an 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 interest rate differentials continuing to weigh on the Euro.

Economic growth in the Eurozone is lackluster. Data shows the Eurozone Composite PMI fell from 52.8 to 51.9, with momentum in both manufacturing and services weakening. Excluding Ireland, the 2026 growth forecast is only 1.0%, significantly lower than the US economy's resilient performance. Although Lagarde sent hawkish signals, stating 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 stubbornly high inflation data are reshaping market expectations for the Federal Reserve's monetary policy path. The Fed will likely maintain interest rates 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 headline economic outlook suggests the Fed should remain on the sidelines—and might even put rate hikes back on the table later this year or next—in practice, the Fed may stay on hold until the end of Powell's term in May.

Euro's rebound lacks strength; volatile downward trend may become the dominant theme.

Recent positive data from the Eurozone is unlikely to reverse its structural weakness. Data released by Eurostat on January 19 showed the Eurozone's annual inflation rate for 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 mostly reflects short-term fluctuations and cannot change the overall pattern of sluggish economic recovery.

S&P Global data shows that the Eurozone manufacturing PMI once fell below the boom-bust line, and recovery momentum in the services sector is also weakening. Improvements in isolated data points are 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 bottomed out and broke above the channel, finding support at 1.1580, if US economic data continues to improve alongside hawkish Fed comments, EUR/USD could retest that support level. If the ECB sends more dovish signals, it could even test the 1.15 psychological level.