France is urging EU nations to use the so-called “trade bazooka” against the US because it feels the trade deal is unfair. The EU Anti-Coercion Instrument, Regulation 2023/2675, is a useful tool for the EU to identify and respond to economic pressure from outside countries.

Focus of Regulation 2023/2675

Regulation 2023/2675 concentrates on trade, investments, services, public procurement, and intellectual property rights. It ensures responses are appropriate, reasonable, and comply with international law. With the French president pushing to use this trade weapon against the US, traders should brace for increased market volatility. His strong statements about “unfair” trade practices add new geopolitical risks. This uncertainty can lead to turbulence in cross-asset derivatives. We should expect more fluctuations in the EUR/USD currency pair, which directly reflects this tension. Traders might think about buying straddles or strangles on this pair, allowing them to profit from big moves in either direction. Historically, just the threat of trade sanctions between these regions has led to sharp price swings.

Impact on Major Sectors and Market Volatility

The stakes are very high, with US-EU trade in goods and services exceeding $1.3 trillion in 2022. Key sectors like automotive, aerospace, and luxury goods are in the crosshairs. We recommend considering protective put options on exchange-traded funds for European automakers or the broader CAC 40 index. This scenario mirrors the trade disputes from 2018-2019, which caused high volatility and risk aversion. During that time, implied volatility for major indices spiked even before any tariffs were introduced. We anticipate a similar pattern now, where fear of the “anti-coercion” tool being applied could shake up the markets. The European VSTOXX volatility index, which has recently been around 13, suggests relative calm. This is an opportunity to buy call options on the index as an inexpensive hedge against a potential breakdown in trade relations. If the French president’s push gains support in the EU, this index might quickly rise. Since this new legal tool is untested against a partner as significant as the United States, its potential use creates serious uncertainty. This could weigh more heavily on European stocks than on US stocks at first, as markets dislike uncertainty. Therefore, considering positions that are net short on European indices while being long on US ones might be a wise strategy. Create your live VT Markets account and start trading now.

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