The current situation in the foreign exchange market clearly highlights a risk that was repeatedly flagged already last year. This risk appears to be particularly underestimated by proponents of the so called “TACO” (Trump Always Chickens Out) strategy, which is based on the belief that President Trump ultimately always backs away from his most confrontational decisions. The problem, however, is that given the unpredictable and often chaotic nature of policy making under the current US administration, there is a genuine danger that markets cross a threshold beyond which a loss of confidence becomes difficult to reverse.
From an investor’s perspective, this implies the risk of entering a phase in which even later attempts to soften the political stance will no longer be sufficient to halt negative market dynamics. In other words, markets may stop responding to deescalatory gestures if they are perceived as too late or lacking credibility.
Among the potential “critical points” long discussed are the risk of the US dollar losing its safe-haven status and a perceived erosion of the Federal Reserve’s independence in the eyes of market participants. If investors begin to seriously price in a scenario in which these pillars are permanently weakened, dollar depreciation could take on a self reinforcing character. In such an environment, even a retreat from the most controversial policy actions may fail to restore stability, resulting in a deeper and more persistent weakening of the US currency.
Recent market developments suggest that this scenario is becoming increasingly plausible. President Trump has indeed attempted to deescalate tensions related to Greenland by stepping back from tariff threats against parts of the European Union, which provided the dollar with only a brief period of relief. At present, downward pressure on the USD has intensified again, underscoring that ad hoc measures are insufficient to rebuild damaged investor confidence. A break above 1.19 in EUR/USD now appears highly likely.
EUR/USD has moved back into its medium-term upward channel. The declines seen in late December 2025 and early January proved to be only a temporary episode that briefly altered the direction of price action. For now, the uptrend in the main currency pair appears to remain intact.
