The European Union plans to remove all tariffs on US industrial goods. They want to pass this new legislation quickly, likely by the end of the week. The EU hopes this will encourage the US to rethink the 27.5% tariffs on EU cars. The EU is also looking at special tariff rates for certain seafood and agricultural products. This is meant to improve trade relations, with the main goal of reducing auto tariffs. If the EU’s proposal is ready by the end of the month, the lowered 15% auto tariff could be made retroactive to August 1.

Market Sentiment Shift

The news about the EU possibly acting fast to cut tariffs on US industrial goods suggests a big change in market sentiment. This could help ease trade tensions that affected German auto exports to the US, which dropped by over 8% year-over-year in the first half of 2025, according to VDA data. If the new 15% auto tariff is backdated to August 1, it could significantly boost third-quarter earnings for major car manufacturers. For traders, this indicates a positive outlook for the European auto sector and the German DAX index, which has underperformed the S&P 500 by nearly 4% this year. We should consider buying near-term call options on companies like Volkswagen and Mercedes-Benz, as their stocks react strongly to US tariff news. Additionally, trading DAX index futures could be a direct strategy to benefit from a broader European recovery linked to this news. If the deal goes through, the Euro may strengthen against the US dollar, reversing some earlier summer losses. Implied volatility on EUR/USD options has risen to 8.2%, above its three-month average, creating an opportunity. Selling EUR/USD put options could be a good way to express a positive outlook on the Euro while taking advantage of higher premiums.

Volatility and Risk Management

If a deal is officially announced by the end of the week, we can expect a sharp drop in market volatility. The VDAX-NEW, which measures DAX volatility, is currently high due to uncertainty around this trade issue. Selling straddles on the index may be profitable, as it bets on volatility decreasing and the market settling at a higher trading range after the positive news is factored in. However, there is a risk that this proposal could fail, similar to the breakdown in talks we saw in late 2024. Any political pushback within the EU could derail the deal and trigger a rapid reversal. Thus, holding some inexpensive, out-of-the-money DAX put options as a hedge in the coming weeks would be a wise precaution against negative surprises. Create your live VT Markets account and start trading now.

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