EU President von der Leyen talked about the trade deal framework between the EU and the US, describing it as the best possible agreement. This deal stops the use of stacked tariffs and different rates, setting a 15% rate as a permanent maximum. The framework is thought to help avoid a trade war, but it does not include rules for digital services or technology regulation. Some people believe that Europe made compromises during the negotiations, but it’s clear that the US sets its own trade rules.

Impact of the Framework Deal

The framework deal is expected to lead to higher tariffs than those seen under President Biden. During Trump’s presidency, tariffs became key to US trade policy, affecting negotiations with countries like Japan, the EU, and China. Following the deal announcement, the Euro rose against the US dollar. In tandem with the EU agreement, the US and China plan to meet in Stockholm, with a 90-day pause on tariffs expected. Reports over the weekend confirmed that the US and China want to extend the tariff pause for another 90 days. The EU deal also includes an agreement for the EU to buy energy from the US at a 15% tariff rate.

Response to the Deal

The immediate reaction should be to sell volatility. With the risk of a trade war decreased, implied volatility in EUR/USD options and major European stock indices should drop from their recent highs. History shows that solutions to trade disputes, like the 2020 Phase One deal with China, led to a significant drop in the VIX index, and we expect something similar now. The euro’s initial rise is likely a temporary relief rally, presenting a selling opportunity. The deal requires Europe to purchase US energy, creating long-term demand for dollars. Since nearly half of the EU’s liquefied natural gas came from the US last year, this dollar demand will limit any lasting strength of the euro. This new tariff environment creates clear winners and losers for specific sectors. We suggest buying puts on European automakers since the 15% tariff will impact profit margins of the over €30 billion in vehicles Germany exports to the US each year. Meanwhile, call options on major US energy exporters are becoming more appealing due to their access to the European market. A key takeaway from von der Leyen’s announcement is what was not included: digital and tech regulations. This absence indicates that technology will be the next main area of trade conflict, leading to future uncertainties for companies in that space. Traders should be ready for renewed volatility in tech-heavy indices as this unresolved issue resurfaces. Create your live VT Markets account and start trading now.

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