EUR/USD: the dollar index hits a 4-year low

The euro emerged victorious from the somewhat chaotic diplomatic events that unfolded last week in Davos. More generally, it is the trade policy pursued by Donald Trump since the beginning of his second term in the White House that is weighing on the dollar, gradually eroding its safe-haven status. The single currency surpassed $1.20 yesterday, while the dollar index hit a four-year low.

As a reminder, Donald Trump threatened European countries opposing his territorial claims on Greenland with tariffs, before backtracking, as is his wont.

"This temporary about-face by Donald Trump on the new tariffs he brandished against eight European countries in the Greenland issue primarily reflects the immediate effect of market volatility on the individual," says Sebastien Grasset, CEO and Head of Asset Management at Auris Gestion. "Trump claims to have secured, through NATO, enhanced Arctic security cooperation without infringing on Danish sovereignty. Is this a case of 'escalate to de-escalate,' or just another episode of the hubris of a man more interested in showcasing a territory larger than Russia's (and one day seizing its resources) than in gaining a new security advantage (the existing defense agreements between Denmark and the US already allow for the deployment of numerous permanent military infrastructures in Greenland)?"

"In any case, the European firmness on Greenland (suspension of the trade agreement with the US and threat to activate the EU's Anti-Coercion Instrument) seems to have worked, at least for now. On another front, Canada risks occupying the White House as Prime Minister Mark Carney embraces a strategic pivot toward China and a 'historic break' with the US, despite Trump's threat of 100% tariffs on all Canadian imports."

Ironically, this sequence of events coincides with the signing of a major trade agreement between the European Union and India, after 19 years of negotiations.

The latest development: the President declared the value of the dollar to be "excellent," since a weaker currency encourages exports. Trump, who has long accused Europeans of manipulating their currency in this way, is clearly enjoying this... but the flip side is the risk of accelerating inflation in the US, and therefore a delaying action by the Fed, which will inevitably be less inclined to cut interest rates. Everything Trump hates!

Federal interest rates will be the focus of discussion this Wednesday with the outcome of the Fed's first Federal Open Market Committee (FOMC) meeting of the year. This FOMC meeting will result in a status quo on interest rates themselves, as the Fed can afford to delay, thanks to the strong resilience of the world's largest economy. The latest statistics, particularly on employment and consumption, confirm this. Orders for durable goods excluding automobiles rose 0.5% month-on-month, well above expectations. Including transportation items, the jump was 5.2%. However, yesterday's surprise drop in the Conference Board's consumer confidence index to 84.6 shows that consumer sentiment, essential to growth, can be volatile.

"The press conference could take on a political dimension, as Donald Trump is expected to announce Jerome Powell's replacement soon, and two investigations are underway against FOMC members (Powell and Cook). However, it is likely that the current Fed chairman will avoid elaborating on these issues," note the market strategists at Indosuez WM.

"Since the December meeting, growth has continued to surprise us, while jobs data has been reassuring: a falling jobless rate and continued restrained jobless claims. This should allow the Fed to hold off and wait for further progress on the inflation front before continuing the normalisation of its monetary policy."

Right now, the EUR/USD is trading at $1.1962.

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 element that lends credence to a bullish scenario.

MEDIUM-TERM FORECAST
In light of the above technical factors, our outlook for the EUR/USD is positive in the medium term.

Our entry point is at $1.1967. The price target for our bullish scenario is $1.2624.