The EUR is under pressure from US President Donald Trump’s campaign to impose American rule over Greenland in the name of national security. Following a decision by Denmark and several European NATO allies to send military personnel to Greenland for an exercise, Trump threatened to impose a 10% additional tariff on goods from the UK, Denmark, Norway, Sweden, France, Germany, the Netherlands, and Finland, starting February 1. These levies are scheduled to rise to 25% on June 1 until a deal for the "Complete and Total purchase of Greenland" is finalized. This move has effectively derailed the July 2025 "Turnberry" trade agreement, which had temporarily stabilized tariffs at 15% in exchange for zero duties on US industrial goods. In response to this new "economic blackmail," the EU has paused ratification of the deal and is now debating activating its "anti-coercion instrument" to retaliate against U.S. interests.
However, the Fed’s blackout period ahead of next week’s FOMC has removed scope for policymakers to lean against easing expectations, temporarily stabilizing the USD without rebuilding conviction. At the same time, attention has shifted to Trump’s eventual nomination of a successor to Fed Chair Jerome Powell, alongside the overhang from Powell’s ongoing court case, which has intensified scrutiny over the political pressure on the central bank. Trump’s desire for lower interest rates, combined with legal challenges involving the sitting chair, raises concern about the perception of future monetary policy as less independent. Even if the FOMC delivers a steady message, these institutional risks are likely to keep the greenback’s medium-term downside risks intact. The market remains alert to January 20 as the next scheduled opinion day for a ruling on Trump’s IEEPA tariffs, while recognising the possibility of a delay to June.
USD/JPY peaked at 159.45 and declined to 158.12 last week, following Japanese Finance Minister Satsuki Katayama’s warning that last September’s US-Japan joint statement allows Japan to take decisive measures against excessive exchange rate movements that misalign with fundamentals. Markets widely expect the Bank of Japan to raise its fiscal 2026 economic growth forecast from 0.7% at its January 22-23 meeting, in anticipation of Prime Minister Sanae Takaichi’s supplementary budget for household spending and capital investment. The market is also mindful of BOJ Governor Kazuo Ueda’s remark that the neutral rate estimate is too wide, at 1.00-2.50%. Meanwhile, Takaichi may capitalize on her popularity and call for a snap election, which could backfire. Takaichi is popular, but the Liberal Democratic Party is not. Voter fatigue may not lead to the voter turnout needed to ensure victory, especially against a united opposition front, the Central Reform Alliance, a strategic merger between the Constitutional Democratic Party of Japan (CDP) and Komeito.
Hence, FX markets are being pulled in different directions, resulting in a tactically defensive but strategically uneasy trading environment. Currencies could remain range-bound and reactive in the short term. Yet, the USD’s medium-term downside risks remain alive as investors reassess whether higher yields and lower equities signal credibility risks in the US policy framework.
Quote of the Day
“You cannot shake hands with a clenched fist.”
Indira Gandhi
January 19 in history
Indira Gandhi became India’s first female prime minister in 1966.
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