German Chancellor Friedrich Merz will work closely with French President Emmanuel Macron and EU Commission President Ursula von der Leyen in the upcoming weeks. Their main focus is to deal with the rising trade conflict with the United States. Merz shared his thoughts with ARD, confirming he has spoken with other European leaders and Donald Trump. The goal is to find a solution before Trump’s proposed 30% tariffs on EU and Mexican imports take effect on August 1.

European Unity and Dialogue

Merz warned that these tariffs could hurt Germany’s economy. He emphasized the need for European unity and constructive talks with the U.S. While he hasn’t dismissed the idea of retaliatory tariffs, he believes any countermeasures, like those proposed by France, should wait until after the August 1 deadline. In simple terms, Merz is leading a political effort to respond quickly to a potential threat that could change trade relations between Europe and the U.S. Trump’s 30% tariff idea isn’t just hypothetical; it could raise costs for EU exporters and disrupt supply chains. German manufacturing, especially in vehicles and machinery, and French agriculture are likely to be affected the most. Macron has adopted a more defensive stance, urging unity among member states. His government is preparing a list of U.S. imports to target in retaliation. However, Merz is advocating for restraint, suggesting they wait to see if quiet negotiations yield results. He believes showing readiness to retaliate is necessary, but acting too soon could harm diplomatic efforts and lead to a full-blown tariff war. Von der Leyen has been quietly coordinating with both leaders. She has stated that Brussels will not accept a long-term trade imbalance but is working closely with others to maintain unity within the EU. This suggests that policy decisions may be careful, delayed, and coordinated.

Market Implications and Trader Strategies

Traders focused on derivatives, especially those involved with eurozone equity indices, USD/EUR pairs, and industrial commodities, could see rising volatility in the next two weeks. News about tariffs typically causes strong reactions. Political news often leads to sharp price movements, creating short-term pricing inefficiencies that traders could capitalize on. We may also see expected correlations break down temporarily, especially between safe-haven assets and riskier investments. From Merz’s comments, it’s clear that hedging short-term euro-area exposure or considering call options on U.S. dollar assets would be wise at this time. Timing is crucial for hedging. Delaying too long could result in higher costs for protection once news shifts from discussions to decisions. While retaliation has not yet been announced, option markets might begin to factor this in by late July, leading to higher volatility expectations in both FX and equities. Additionally, sentiment towards European exporters, especially in the auto and chemical sectors that rely on the U.S. market, could decline if diplomatic messages appear less coordinated. Some traders might focus on delta-neutral strategies, especially around earnings reports when risks from headlines intersect with corporate performance. If Merz’s call for a pause on countermeasures holds, it could create a brief but tradeable period of calm. Outside of key event dates, traders may take more cautious directional bets and look for better opportunities in relative value spreads. In summary, this situation is fluid, with significant tension around upcoming calendar events—official statements, policy announcements, and crucially, any reactions from Washington. Create your live VT Markets account and start trading now.

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