Precision exit? Hedge funds shorted the euro ahead of Trump's threat to impose tariffs on Europe

In the days before U.S. President Trump threatened new tariffs against European countries over the Greenland issue, hedge funds had already sharply cut their bullish bets on the euro. This timely adjustment of positions shows that some market capital had preemptively shifted into safe havens ahead of this escalation in geopolitical tensions.

Data from the U.S. Commodity Futures Trading Commission (CFTC) shows that in the week ending January 13, leveraged funds' positions in the euro shifted to a small net short. This is the first time since late November last year that the funds have turned bearish. This shift occurred before the tariff threat became public, and may further intensify the downward pressure on the euro.

According to CCTV News, President Trump posted that he would impose a 10% tariff on eight European countries opposing his acquisition of Greenland, which would be increased to 25% after a few months, until an agreement for the “complete and thorough purchase of Greenland” is reached, sparking market concerns about a trade war.

Concerns about a renewed trade war are heating up, as investors assess the possible damage to European economic growth. Due to this uncertainty, the euro initially dropped 0.2% after the news was released, then rebounded 0.4% to $1.1641, while the Bloomberg Dollar Spot Index fell 0.2%.

Morgan Stanley has previously warned that traders currently underestimate the risk of extreme scenarios, which could trigger sharp fluctuations in major currencies, especially the euro.

Capital rotation and technical deterioration: geopolitics has a double-edged sword effect

CFTC data reveals a notable reversal in market sentiment. Leveraged funds flipped from long to short at a key moment, indicating that some institutional investors are already hedging potential policy risks. Nick Twidale, chief analyst at AT Global Markets, pointed out that hedge funds are comfortable with their current net short positions, and if this “dispute” looks likely to develop into a full-blown trade war, they may even increase their short positions.

At the same time, technical indicators are aligning with the shift to bearish positions. The euro's long-term momentum signal turned negative last week for the first time in nearly a year, ending a previous 43-week bullish streak. Historical analysis shows that while this signal reversal does not necessarily guarantee a selloff, when it persists, it often signals a sharp decline, indicating the euro faces asymmetric downside risk.

Looking to the future, market views are cautiously pessimistic. Commonwealth Bank of Australia strategists Joseph Capurso and Carol Kong wrote in a report that due to the heightened tensions, the euro-dollar may test the 1.1499 support level this week. They believe that with the Greenland sovereignty dispute at its center, the trade conflict will likely escalate further before cooling. Bloomberg market strategist Conor Cooper also noted that the euro’s moderate decline may suggest that traders are also alert to negative impacts on the dollar.

Although market sentiment is bearish, the spillover effect of geopolitics may be a double-edged sword. If this situation turns into a broader dollar problem, the euro may gain some support. According to an analyst at Deutsche Bank, President Trump's trade threat to European governments over Greenland has increased the likelihood that the latter will reduce their holdings of U.S. assets, which would benefit the euro. The potential for capital repatriation may limit the euro's downside, although options market data show confidence in euro upside attractiveness is waning among traders.

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