European Union officials and diplomats suggest that a trade deal between the EU and the US may be coming soon. This deal could establish a 15% baseline tariff on all imports from Europe, along with a possible 50% tariff specifically on steel and aluminum. As a result of these updates, the EUR/USD exchange rate has slightly recovered and is now trading around 1.1730. However, it is still down about 0.15% for the day.

Understanding Tariffs

Tariffs are taxes on imported goods designed to protect local markets by making foreign products more expensive. Unlike regular taxes, which consumers or businesses pay at purchase, tariffs are paid by importers when goods enter the country. Former US President Donald Trump intends to use tariffs to strengthen the US economy. In 2024, the largest exporters to the US were Mexico, China, and Canada, with Mexico at the top with $466.6 billion. Trump plans to impose tariffs on these countries and hopes to use the revenue to lower personal income taxes. The proposed trade framework with the European Union introduces a lot of uncertainty, likely increasing market volatility, especially in currency and commodity markets. Therefore, traders should think about strategies to benefit from expected price fluctuations, such as buying options. With the chance of a 15% baseline tariff, we expect continued downward pressure on the EUR/USD pair. The Euro has already been weak, trading around 1.07 in June 2024, and new tariffs would likely worsen this situation. We recommend buying put options on the Euro to protect against or even profit from a decline toward important support levels seen in late 2022.

Targeted Response To Steel Tariffs

The proposed 50% tariff on steel and aluminum requires a focused response in the industrial sector. When significant steel tariffs were last imposed in 2018, US steel prices soared over 40%, while European producers like Thyssenkrupp and ArcelorMittal faced challenges. We suggest looking at call options on US steel companies and put options on European competitors to prepare for similar outcomes. Trump’s broader protectionist approach, targeting major exporters like Mexico and China, signals that this could be part of a global trend. This may lead to a general risk-off sentiment that impacts stock markets beyond the directly affected sectors. To hedge against this systemic risk, we are considering call options on volatility indexes like the VIX, which has been trading at relatively low levels below 15, offering a cost-effective shield for portfolios. Create your live VT Markets account and start trading now.

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