The European Union has announced a new 15% tariff that will apply widely. This tariff includes Section 232 tariffs but leaves out steel and aluminum. It will cover cars, car parts, and pharmaceuticals, pending the outcome of an investigation in the United States. The EU has stated that a joint statement with the US is ready and just needs a response from the US. This agreement serves as a framework for a trade deal. While it provides immediate relief, it is not legally binding. This approach is similar to strategies used with other countries like China, the UK, and Japan.

Opportunities For Price Swings

The new framework deal with the US looks like it offers relief, but since it’s not legally binding, things can change fast. This creates a good chance for price fluctuations. We should explore options strategies to take advantage of potential price swings in the coming weeks. European automaker stocks, such as Volkswagen and Stellantis, rose during July based on hopes for a deal. However, the 15% tariff will still affect the profit margins for the over €40 billion worth of vehicles exported to the US in 2024. It might be wise to buy put options on major European auto ETFs as a way to protect against this new cost. The EUR/USD currency pair will likely stay volatile but within a certain range for now. We saw a quick jump to 1.09 after the initial announcement, but the non-binding nature of the deal sets a firm ceiling. Traders might consider using strangles or straddles on the currency pair to navigate this fluctuating price action without needing to pick a specific direction.

Risks In The Pharmaceutical Sector

We need to keep a close watch on the pharmaceutical sector, as the deal leaves it vulnerable to future tariffs, depending on the US investigation. Last year, EU pharmaceutical exports to the US topped €65 billion, so any new duties could have a significant effect. Buying long-dated put options on European healthcare indices may be a smart way to prepare for this risk. This type of conditional agreement usually heightens overall market anxiety. Europe’s main volatility index, the VSTOXX, fell to a low of 14 in late July, which now appears overly relaxed given the uncertainty. We believe buying VSTOXX futures or call options is a cost-effective way to protect a portfolio against potential setbacks in these discussions. Create your live VT Markets account and start trading now.

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