EUR/USD: Duel in Davos Town

The euro managed to hold onto the gains made on Monday and Tuesday, following a weekend marked by Trump's renewed tariff threats against European countries opposing his plan to annex Greenland. This sequence of events continues on Wednesday, as the US president has just arrived in Davos for the economic forum. He will speak there in the afternoon. The ECB president will also speak later this afternoon.

This "duel in Davos Town" is clearly not to the markets' liking, as equity markets on both sides of the Atlantic are plummeting. The euro is an exception, and the explanation is clear: market participants expect Donald Trump's threats to strengthen the European bloc and fear they will put pressure on US bonds. As a result, the VIX, the fear index, has climbed above 20 points while the Euro has rebounded, which is unusual.

"The United States has a major weakness: it depends on others to pay its bills through large external deficits. Europe, on the other hand, is the largest lender to the United States: European countries hold $8 trillion in US bonds and stocks, almost twice as much as the rest of the world combined," notes George Saravelos of Deutsche Bank. "In a context where the geoeconomic stability of the Western alliance is being called into question in an existential way, it's not clear why Europeans would be willing to play this role," adds the currency expert at the German bank.

Is the European Union tired of bowing its head? This is clearly the meaning behind the threat brandished by the unpopular Macron: to propose the use of an anti-coercion tool, a trade "bazooka" never before used by Brussels. A weapon designed to be deployed when all diplomatic avenues have failed.

"In this sequence of escalating trade and geopolitical tensions, the Greenland issue falls within the same logic of power dynamics, illustrating once again the Trump administration's willingness to use unconventional levers to serve its strategic objectives," analyses Thomas Giudici, Head of Fixed Income at Auris Gestion.

"Unlike the Turnberry Agreement, signed at the end of July 2025, where Europe quickly bowed to pressure and emerged weakened internationally, European countries seem, this time, to be showing a bit more resistance by responding with threats of retaliation, notably through the use of their 'anti-coercion' instrument (up to $92 billion in tariffs on American products could be imposed, in addition to restrictions on American companies' access to public procurement). While it is tempting to applaud this stance, experience shows how quickly this facade of unity can crumble, with each country ultimately prioritizing its own interests."

And even the Treasury Secretary, Scott Bessent, "the adult in the room," is taking a tougher stance.

"It's not just the US president's position that's problematic, but also the fact that his Treasury Secretary, Scott Bessent, is adopting the same stance. We recall that when Donald Trump launched his trade war last year, Scott Bessent helped to ease tensions with a less aggressive approach. He is clearly perceived by investors as the 'adult in the room' within the US administration, with Donald Trump recently indicating that he listens to his recommendations. However, his attitude yesterday in Davos surprised, even shocked, when he declared that it would be 'very unwise' for Europe to take retaliatory measures, adding that everyone should 'take the President at his word' (regarding his desire to acquire Greenland)."

This has had a tangible impact on the US 10-year Treasury yield, which has risen to near 4.30%. Meanwhile, the single currency is finding welcome support in positive signals about German growth. As a reminder, the ZEW, the confidence index for the Eurozone's largest economy, published yesterday, jumped nearly 15 points to 59.7, far exceeding already optimistic expectations.

"Despite the announcement of new tariffs by the United States last weekend, export-oriented industries are experiencing significant improvements in some cases. In particular, the trade balances for the steel and metallurgy sector, as well as for mechanical engineering, rose by 18.1 and 22.6 points respectively. The automotive industry's trade balance increased by 16.4 points to -5.4 points. The trade balances for the chemical and pharmaceutical industries and for electrical engineering also improved, by 12.5 and 14.1 points respectively," Achim explained.

Aline Goupil-Ragues, of Ostrum AM, believes that "2026 will be the year of renewed growth in Germany, driven by investments in infrastructure and defense. The government announced an additional 49 billion euros in military spending on 18 December. Growth is expected to reach at least 1% in 2026 after stagnation in 2025 and two years of recession. For this recovery to be sustainable, structural reforms must also be adopted."

"Germany is the G7 country with the fastest-aging population, which will weigh on its potential growth and public finances. Pension reform would help mitigate this financial impact. The government must also take steps to ensure a short approval process for investment projects and reduce bureaucracy to encourage a recovery in private investment, which is currently sluggish. However, the approach of key regional elections in September risks hindering the adoption of the reforms necessary to ensure sustainable growth in Germany."

Right now, the EUR/USD is trading at $1.170.

KEY TECHNICAL ELEMENTS
We are resuming our long positions on the EUR/USD after the strong rebound at the beginning of this week off the 200-day moving average (in brown). Post-rebound volatility is a key factor supporting the bullish scenario.

MEDIUM-TERM FORECAST
Based on the above key technical factors, our outlook for the EUR/USD is positive in the medium term.

Our entry point is $1.1714. The price target for our bullish scenario is $1.2214. To protect your capital, we advise placing a stop-loss order at $1.1589.

The expected profit for this forex strategy is 500 pips, and the potential loss is 125 pips.