EUR/USD: the euro comes out on top after a crazy week

What if the Euro ultimately emerged stronger from last week's somewhat chaotic diplomatic sequence? As a reminder, Donald Trump quickly ruled out any military intervention in Greenland and then lifted his threats to impose tariffs on countries opposing his views on the Arctic island. He also claimed to have outlined an agreement with NATO Secretary General Rutte. Mr. Rutte, surprised by this, immediately asserted that sovereignty issues had not yet been discussed. He, for his part, warned that there was still "a lot of work" to be done to reach an agreement.

Meanwhile, the very encouraging figures for Germany, the Eurozone's largest economy, which is on the verge of emerging from its crisis, are helping to fuel the appetite for the single currency. As a reminder, the ZEW, the confidence index for the Eurozone's largest economy, published and somewhat overlooked at the beginning of last week, jumped by nearly 15 points to 59.7, far exceeding already optimistic expectations.

"Despite the announcement of new tariffs by the US last weekend, export-oriented industries are experiencing significant improvements in some cases. In particular, the balances for the steel and metallurgy sectors, as well as those for mechanical engineering, rose by 18.1 and 22.8 points respectively. The balance for the automotive industry increased by 16.6 points to reach -5.4 points. The balances for the chemical and pharmaceutical industries and for electrical engineering also improved, by 12.3 and 14 points respectively," explained Achim Wambach, President of the eponymous institute.

Aline Goupil-Rague of Ostrum AM believes that "2026 will be the year of renewed growth in Germany, driven by massive investments in infrastructure and defense. The government announced an additional 50 billion euros in military spending. Growth is expected to reach at least 1% in 2026 after near 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."

Finally, a word on the Fed, which concludes its first FOMC meeting of the year on Wednesday: the institution can afford a wait-and-see approach to its federal interest rates, given that the economy is showing tangible signs of resilience, particularly with private sector employment weakening only very, very slowly.

"Despite Donald Trump's objections, the Fed can afford to wait for more information on the state of the economy at the start of this year before cutting rates again, probably in the spring," anticipates Christopher Dembik, investment strategist at Pictet AM.

"The meeting of the US Federal Reserve (Fed) is the focus of the week. It meets on Tuesday and Wednesday. It is expected to leave its key interest rate unchanged. Why? The US economy is strong. We expect growth to accelerate again in the second half of the year, driven by the rate cuts already implemented, low energy prices, and fiscal stimulus measures - such as the checks to households discussed at the end of last year."

"Next week, the Fed is expected to keep its rates unchanged after three consecutive rate cuts at the end of 2025, confirming the Fed's more patient and cautious stance now that rates are no longer so restrictive. The Fed meeting could be partly overshadowed by President Trump's announcement of his choice for the next Fed chairman. According to online betting, former governor Warsh is the favorite (46%), but BlackRock's amazig head of bonds, Rieder, remains in the running (30%)," notes Xavier Chapard of LBPAM.

Ultimately, it is the political signals, both domestic and foreign, from the Trump administration that are gradually causing the dollar to lose its status as a predictable currency. Let's not forget that Europeans hold 10% of US Treasury bonds...

Right now, the EUR/USD is trading at $1.1876.