EURUSD Rebounds on Greenland Tensions Ahead of US Inflation, GDP

The eurodollar extended to late-December highs amid trade tensions between the US and Europe, as Trump ramps up pressure on Greenland, with the focus now on US data to see if dollar weakness can subside.

Key Upcoming Events

• The US November PCE price index is expected to show inflation remains elevated at 2.8%, potentially reducing the odds of the Fed easing in the near term.
• Trade tensions over Greenland have sparked renewed "sell America" trading, weakening the dollar.
• The US economy is expected to have accelerated in the final quarter of the year, which could return some support for the greenback.

The Return of the "Sell America" Trade

Last week, the EURUSD was trending lower as the odds of a Fed rate cut this quarter diminished in the wake of better than anticipated economic data. But US President Donald Trump's announcement that he would impose tariffs on certain European allies if they didn't support his ambitions on Greenland sent the dollar lower and the euro higher. Investors worried about exposure to US markets worried that last year's "sell America" trade in the wake of the "Liberation Day" tariffs would repeat. Yields on US debt rose as investors sold US assets amid concerns about prolonged uncertainty and the potential acceleration of the de-dollarisation trend. However, analysts note that the market is still doubting that tariffs will be imposed at the start of next month, hoping for a de-escalation or resolution of the Greenland issue by then. Trump will be in Europe for the WEF Conference and is expected to meet with multiple European leaders, including some of those he'd threatened with tariffs over the weekend.

Attention now turns to upcoming data releases, with the Fed's preferred inflation metric expected to be the highlight on Thursday ahead of the FOMC meeting next week. The markets are expecting no rate cut at the meeting, but there are hopes that the data could justify easing at the next FOMC gathering in March. The official December CPI was released last week, showing that core inflation fell to its lowest level since early 2021. However, the November PCE price index is expected to remain unchanged at 2.8%, well above the Fed's target and a multi-month high. This could suggest that inflation remains sticky, justifying expectations that the Fed won't get around to cutting until June.

US Economy Keeps on Trucking

Concurrently with the inflation data, the final release of the US Q3 GDP is scheduled, having been delayed by the government shutdown last year. The consensus is that the preliminary acceleration to 4.3% from 3.8% will be confirmed, another factor that could suggest inflation will remain elevated. The Fed's GDPNow estimate for Q4 economic growth is even faster, at an annualised 5.3%. A strong US economy could weaken the "sell America" move, particularly given the EU's sluggish growth. The EURUSD could retrace if hotter inflation means the Fed will keep rates unchanged, as the ECB has done. On the other hand, a miss could compound the current dollar weakness, supporting the EURUSD.

EURUSD 3-Day Streak Leaves Behind Flag

EURUSD rose as much as 1.6% this week alone after leaving behind the golden pocket of 1.1600, a 3-day winning streak. However, it met stiff resistance at 1.1769 and has since pulled back. If the 1.1700 handle holds firm, breaking past the peak would confirm a bullish flag pattern and could unlock 1.1800 and the upper VWAP at 1.1824, as the RSI still suggests further upside. On the flip side, losing the middle VWAP will expose the 50% Fibonacci at 1.1638, with further declines paving the way for 1.1579.

Source: SpreadEx | EURUSD, Daily Chart