EUR/USD is holding steady near 1.1650 as the US Dollar gains strength, driven by positive news about US-China trade talks. US and Chinese officials are set to meet in Malaysia to continue discussions, following recent increases in tariffs. The Euro faces slight pressure against the US Dollar, with EUR/USD trading above 1.1650, while the US Dollar Index sits at 98.50 after a recent uptick. Isabel Schnabel from the European Central Bank (ECB) notes that the Eurozone is falling behind the US in digital advancement and productivity due to rising energy costs and diminishing export markets.

Possible Outcomes of US-China Trade Discussions

The trade talks between the US and China may ease immediate market worries, but uncertainties remain. President Donald Trump has warned of potential 155% tariffs by November 1 if no agreement is reached. At the same time, the Dollar’s potential for growth is limited due to a dovish Federal Reserve and an ongoing government shutdown. The US government shutdown has now lasted three weeks, as Congress works to pass a short-term funding bill. The Dollar is showing mixed results against major currencies, with the Canadian Dollar having the largest drop of 0.34%. Given the uncertainty around the US-China trade discussions, traders should think about buying volatility as the November 1 deadline approaches. Options strategies like straddles on EUR/USD, which can earn money from big price movements in either direction, might be beneficial. We recall the sharp market swings during the trade disputes from 2018 to 2020, and the current situation feels similarly unpredictable.

Trading Strategies to Consider

The inherent weakness in the Euro, highlighted by the ECB’s concerns about competitiveness, leans towards a bearish outlook. This is backed by recent data showing that the Eurozone’s flash manufacturing PMI has stayed below 48.5 for over a year, indicating contraction. Thus, buying EUR/USD put options or setting up put spreads to reduce costs could be a wise approach for potential downside. However, simply taking a long position in the US Dollar carries risks due to the dovish stance of the Federal Reserve and the ongoing government shutdown. This stands in contrast to the aggressive rate hikes that previously supported the Dollar until 2024. Domestic challenges could limit substantial gains for the Dollar, even if a trade agreement is achieved. The current implied volatility for EUR/USD is relatively low, making options more affordable than during previous tense periods. In past instances of tariff escalations like in 2019, currency volatility indices rose by over 25% in just a few days. If a deal is not secured this time, we could see a similar or even greater spike in volatility. With the US Dollar Index already high at around 98.50, traders may want to protect themselves against a sudden downturn. One strategy is to sell out-of-the-money EUR/USD call options while holding long put positions, creating a risk-reversal. This method makes downside protection on the Euro cheaper and clearly defines the risk if an unexpected trade agreement leads to a sharp rally in the currency pair. Create your live VT Markets account and start trading now.

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