USD: Softer start as trade risk returns

The dollar opens the week on the back foot after weekend headlines that President Trump plans to levy tariffs on European imports, linked to the Greenland dispute. The White House signalled an initial 10% charge on EU and UK goods from 1 February, with the rate rising to 25% by June.

Risk appetite has dipped accordingly. Global equities are lower and the broad dollar index is softer, but the FX response remains measured. Early price action has the feel of a light ‘Sell America’ rotation rather than a full risk event. That reflects both tariff fatigue and the view that threats may again be used primarily as leverage.

We also flag an added constraint: markets are increasingly focused on legal risk around the administration’s tariff authority. Prediction markets continue to price a meaningful chance the Supreme Court limits or overturns the current approach, potentially capping follow-through.

EUR: Headline risk, but underpinned

Europe sits at the centre of the shock, leaving the euro exposed to negative trade headlines and wider geopolitical noise. The EU is reportedly preparing retaliatory measures and has signalled it may pause elements of last year’s trade agreement, raising the odds of a tit-for-tat escalation.

Even so, EUR/USD is holding comfortably above 1.16 this morning, with losses largely concentrated against the Swiss franc. The early dip in Asia was quickly reversed as traders shifted from a Europe-only shock to a broader geopolitical risk premium, supporting defensive positioning while limiting EUR downside.

Structurally, the Eurozone’s net creditor status remains a stabiliser for the currency in periods of stress, particularly versus the US, where large external financing needs can become a market talking point when confidence wobbles. That said, a sharper repricing would follow if energy leverage becomes part of the negotiation set, where Europe remains strategically vulnerable.

GBP: Firmer tone, but still a USD-led story

Sterling dipped initially in Asia but has since recovered, with GBP/USD back above the 1.34 handle. The broader message is that GBP is increasingly trading as a function of USD direction rather than domestic fundamentals, particularly as the Bank of England remains divided and reluctant to lean decisively towards an easing path.

This week’s UK calendar is heavy, with labour market data due Tuesday and inflation on Wednesday, yet implied volatility remains contained. That suggests the market is not positioned for large sterling moves unless data surprises meaningfully.

In GBP/EUR, upside looks limited with resistance around 1.1540/50 likely to hold. Tariff risk keeps the UK on the radar alongside the EU, while the MPC’s lack of a clean policy signal should dampen knee-jerk reactions. Our bias remains for a drift back towards 1.14. In GBP/USD, the 100-day moving average near 1.3364 is key support, with consolidation around 1.34 the most likely near-term outcome.

Looking ahead

• Key dates: 1 February (initial 10% levy) and June (step-up to 25% if implemented).

• Europe’s response: watch for confirmation on retaliatory tariffs and any formal pause to the EU–US trade deal.

• Risk sentiment: Davos headlines and NATO optics may keep geopolitics elevated in the near term.

• Legal risk in the US: any Supreme Court signals on tariff powers could cap escalation risk and stabilise USD pricing.

• FX positioning: CHF likely remains the preferred hedge; EUR and NOK stay most sensitive to negative trade headlines.

• UK data: labour market (Tue) and CPI (Wed) matter, but GBP moves may remain largely USD-driven unless prints surprise.