The euro fell as traders responded negatively to the US-EU trade deal. While the EU’s agreement includes a list for 0% tariffs, it still faces a 15% baseline tariff, which impacts the European economy. German industry leaders and French officials are questioning the deal’s effects, and US-China trade talks are set to restart. At the same time, the Bank of England and other global policymakers are watching these developments, with the ECB stating there’s no need for immediate action in September.

Market Reaction

Data indicates that UK CBI retail sales improved to -34 from -46. In the markets, the US dollar gained strength while the euro weakened, causing EUR/USD to decline. USD/JPY and USD/CHF also increased, reflecting the dollar’s strength. European stocks opened higher, but the gains were cut back; the DAX rose by 0.1%, and the French index reduced its initial increase. US futures also saw early gains diminished, now rising by just 0.2%. Oil and gold prices stayed stable, and Ethereum is close to testing the $4,000 mark. Bitcoin decreased by 0.7%, bringing it to $118,621. The upcoming week features important events like tech earnings reports, multiple central bank meetings, and the US labor market report.

Investment Opportunities

With optimism about the US-EU trade deal waning, we think the euro is likely to decline further. The political backlash surrounding the deal, especially with its 15% baseline tariff, suggests economic challenges for the Eurozone. This presents a chance to buy put options on EUR/USD, as we expect it to slide towards the 1.1500 level in the coming weeks. As equity markets pull back their initial gains, we foresee higher volatility ahead. The CBOE Volatility Index (VIX), known as the market’s “fear gauge,” is currently at a low 13.5. Historically, it tends to spike during weeks with multiple central bank decisions and major tech earnings. We recommend buying VIX call options or setting up straddles on indices like the S&P 500 to prepare for expected price fluctuations. The dollar’s overall strength, especially against commodity currencies, is a key trend to watch. The US Dollar Index (DXY) recently rose above 106, a multi-month high, applying pressure on pairs like AUD/USD. Given this trend, we are considering selling AUD/USD futures ahead of the US labor market report, as a strong number would likely drive further dollar gains. The differences in central bank positions provide a clear trading signal. As Mr. Kazimir noted, the European Central Bank does not feel immediate pressure to act, whereas the CME FedWatch Tool shows markets anticipating a more aggressive stance from the Federal Reserve. This policy divide is reflected in rising US 10-year yields, reinforcing our long-dollar position against currencies from more dovish central banks. Create your live VT Markets account and start trading now.

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