Assessment of the Impact of Escalating Trade Frictions on European Markets and the Euro Exchange Rate

Based on the data and analysis I have collected, I will provide you with a systematic and comprehensive research report.

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U.S. President Donald Trump announced on January 17, 2026, that he would impose tariff threats on multiple European countries (including Denmark, Germany, the United Kingdom, France, Norway, Sweden, the Netherlands, and Finland) unless these countries agree to the U.S. plan to acquire Greenland [1][2]. The specific measures are as follows:

Implementation Date	Tariff Rate	Applicable Conditions
February 1, 2026	10%	All goods exported to the U.S.
June 1, 2026	25%	Unless a Greenland acquisition agreement is reached

European Council President Antonio Costa and European Commission President Ursula von der Leyen warned in a joint letter that these tariff measures "will damage bilateral relations and could lead to a dangerous downward spiral" [1][2]. EU leaders emphasized that "territorial integrity and sovereignty are fundamental principles of international law", and Europe has decided to deploy military personnel and ships to Greenland to strengthen Arctic security.

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Data as of January 16, 2026, shows the recent performance of major European indices as follows [0]:

Index	Current Level	30-Day Change	Volatility	20-Day Moving Average
Stoxx 50	6,029.45	+5.60%	0.67%	5,860.91
German DAX	25,297.13	+6.13%	0.48%	24,739.71
French CAC 40	8,258.94	+1.77%	0.47%	8,211.94

• European markets had accumulated a gain of approximately 5-6% before the tariff announcement
• The market has not fully priced in the expected impact of tariff risks
• The German market is most sensitive to trade news (the largest gain in the DAX also means greater potential pullback space)

Based on historical trade friction cases and the current market structure, we have constructed the following impact assessment model [0]:

Scenario	Potential Impact on European Stock Markets	Potential Impact on EUR/USD	GDP Impact
Base Scenario (No Tariffs)	0%	0%	0%
10% Tariff Implementation	-2.5% to -3.5%	-1.5% to -2.0%	-0.3%
25% Tariff Implementation	-8.0% to -12.0%	-4.0% to -6.0%	-1.0%
Full-Scale Trade War	-15% to -20%	-8% to -12%	-2.5%

Tariffs have a significant differentiated impact on different industries [0]:

Industry	Tariff Exposure Score	Relative Defensiveness	Risk Rating
Automotive	85/100	20/100	🔴 High Risk
Luxury Goods	75/100	25/100	🔴 High Risk
Chemicals	65/100	35/100	🟠 Medium-High Risk
Technology	55/100	45/100	🟡 Medium Risk
Financials	40/100	60/100	🟢 Lower Risk
Utilities	20/100	85/100	🟢 Defensive
Healthcare	15/100	80/100	🟢 Defensive

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The EUR/USD exchange rate is currently in the range of approximately

[0]. According to forecasts from professional institutions:

Institution	2026 Year-End Forecast	Core Logic
ING Bank	~1.22	Fed rate cuts + accelerated European economic growth
J.P. Morgan	~1.20	Decline in real U.S. dollar yields
BNP Paribas	Below 1.20	The euro is still overvalued by more than 20%
Longforecast	1.28	Structural weakness of the U.S. dollar

• The current exchange rate is below the long-term fair value (approximately 1.20) [0]
• The euro remains one of the most favored long currencies among G10 currencies
• The market believes that inflation control in the euro zone supports the European Central Bank’s patience

Tariff Threats → Profit Pressure on European Export Enterprises → Capital Outflow Expectations → EUR Selling Pressure
                                                          ↓
Slower Economic Growth ← Rising Expectations of ECB Easing ← Declining Attractiveness of Euro Assets

• 10% Tariffs
  : EUR/USD declines by 1.5-2% to the 1.13-1.14 range
• 25% Tariffs
  : EUR/USD declines by 4-6% to the 1.09-1.11 range
• Full-Scale Trade War
  : EUR/USD declines by 8-12%, potentially breaking below 1.05

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Based on the 2026 geopolitical risk landscape, the following allocation adjustments are recommended [0]:

Allocation Category	Current Recommendation	Risk-Adjusted Recommendation	Adjustment Magnitude
Defensive Assets	25%	40%	+15%
European Domestic Assets	35%	35%	0%
Hedging Instruments	10%	15%	+5%
International Exposure	30%	10%	-20%

• Short EUR/USD
  : If holding significant European asset exposure
• Buy CHF/JPY
  : Traditional safe-haven currency allocation (2-3% of the portfolio each)
• Gold Allocation
  : A strategic allocation of 5-15% is recommended as "geopolitical insurance" [0]

• Buy Defensive Put Options
  : Protect European equity exposure
• Increase Exposure to Utilities and Healthcare Sectors
  : Relatively immune to trade frictions
• Increase Exposure to Defense and Military Stocks
  : Perform relatively steadily during periods of geopolitical tension [0]

• Increase Allocation to Short-Term Government Bonds
  : Reduce interest rate sensitivity
• Consider TIPS (Treasury Inflation-Protected Securities)
  : Hedge against potential inflationary pressures
• Reduce Exposure to Long-Term European Bonds
  : Guard against the risk of rising yields

According to analysis from professional institutions, the structural allocation themes for 2026 should include [0]:

Theme	Logic	Allocation Recommendation
Scarce Assets	Driven by supply chain security	Critical minerals, rare earths
Defense Spending	Global re-militarization cycle	Defense stocks, defense ETFs
Regionalized Allocation	Retreat of globalization	Increase domestic/regional assets
Inflation Hedging	Tariffs + fiscal stimulus	Gold, physical assets
Currency Diversification	Changing status of the U.S. dollar	Non-U.S. currencies, cryptocurrencies

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• Tariff threats fail to materialize substantially
• European stock markets may rebound by 8-12%
• EUR/USD rebounds to the 1.22-1.25 range

• Partial tariffs are implemented but on a limited scale
• European stock markets fluctuate downward by 3-5%
• EUR/USD remains in the 1.10-1.15 range

• 25% tariffs are fully implemented + EU retaliation
• European stock markets decline by 10-15%
• EUR/USD breaks below 1.05, and the U.S. dollar strengthens

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1. Short-Term Risks Outweigh Fundamental Changes
   : Despite the recent strong performance of European stock markets, the geopolitical risk premium has not been fully priced in
2. The Euro is in a Relatively Undervalued State
   : The long-term fair value is approximately 1.20, and the current 1.15-1.16 range provides a certain buffer
3. Significant Industry Differentiation
   : Industries such as automotive and luxury goods face direct shocks, while defensive sectors are relatively safe

Action Item	Priority	Explanation
Reduce exposure to European export-sensitive sectors	High	Automotive, luxury goods, industrials
Increase gold allocation	Medium-High	5-10% as insurance
Buy CHF/JPY for safe-haven purposes	Medium	2-3% allocation
Buy put options on the European Stoxx 50	Medium	Protect against downside risks
Increase exposure to defensive sectors	Medium	Utilities, healthcare

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[1] CNN - "Trump administration latest: Tariff threats over Greenland risk ‘downward spiral,’ European countries say" (https://www.cnn.com/politics/live-news/trump-administration-news-01-18-26)

[2] BBC - "‘Europe won’t be blackmailed,’ Danish PM says as Nato allies…" (https://www.bbc.com/news/live/c1j8kw866p3t)

[3] CNN Analysis - "A stunned Europe finally wakes up to Trump’s Greenland threat" (https://www.cnn.com/2026/01/18/europe/europe-greenland-threat-tariffs-analysis-intl)

[4] Morningstar - "5 Charts Every Investor Should Watch in Europe in 2026" (https://global.morningstar.com/en-eu/markets/5-charts-every-investor-should-watch-europe-2026)

[5] Naga - "EURUSD Forecast and Price Prediction: 1.25 in 2026?" (https://naga.com/en/news-and-analysis/articles/eurusd-price-prediction)

[6] DailyForex - "EUR/USD Analysis: Attempts to Form a Buying Base" (https://www.dailyforex.com/forex-technical-analysis/2026/01/eurusd-analysis-14-january-2026/239804)

[7] Finomics Edge - "How Global Tensions Will Affect Your Portfolio in 2026" (https://medium.com/@finomicsedge/how-global-tensions-will-affect-your-portfolio-in-2026-8b618b306059)

[8] Hedgepoint Global Markets - "Oil Market Update – January 2026: Geopolitical Risks vs. Structural Supply Surplus" (https://hedgepointglobal.com/en/blog/oil-market-update-january-2026-geopolitical-risks-vs.-structural-supply-surplus)

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January 19, 2026
Jinling AI Financial Database, BBC, CNN, Morningstar, etc.