The European Parliament’s trade committee has voted to back legislation that would remove European Union duties on a range of United States goods imports. The move advances the EU’s implementation of an EU-US trade deal and keeps the bloc on track to meet US President Donald Trump’s 4 July compliance deadline, reducing the risk of an immediate cross-Atlantic tariff dispute.
In markets, the euro saw a mild pullback after the committee decision. Even so, EUR/USD was still up 0.1%, trading at about 1.1647 at the time of writing.
Implications for the Euro and Monetary Policy
The European Parliament committee’s vote to cut US tariffs significantly de-risks the outlook for the Euro. We believe the slight uptick in EUR/USD to 1.1647 is just the beginning of a potential move higher ahead of the July 4 deadline. With recent Eurostat data showing Eurozone inflation holding firm at 2.6% for May, the European Central Bank has less pressure to cut rates, which further supports the currency.
Equities, Volatility, and Sector Opportunities
We are now more constructive on European equities, particularly German exporters who have been under pressure from this trade friction. German exports to the United States fell by 1.9% in the last reported quarter, a drop we largely attribute to these tariff threats. Looking back at the 2018-2019 period, similar de-escalations saw the German DAX index rally sharply, a pattern that provides a strong historical precedent for the coming weeks.
This resolution of a major trade dispute should also suppress market volatility. The Euro Stoxx 50 Volatility Index (VSTOXX), currently hovering around 14, seems elevated given that a key tail risk is being removed. We see an opportunity in selling volatility, perhaps through writing out-of-the-money puts on broad European indices as the July deadline approaches.
Focus should also be placed on the European auto sector, which was a primary target of the now-averted tariffs. Companies like Volkswagen and BMW derive a significant portion of their revenue from the US market, with auto sales data from May already showing a slight recovery in North American demand. We view long call option spreads on these specific stocks as an effective way to gain levered exposure to this relief rally.
