Peter Navarro, the US Trade Advisor, highlights the challenges in negotiating with the EU because of non-tariff barriers. He points out that the EU’s VAT tax acts like a subsidy and calls for both VAT tax relief and lower tariffs to make trade smoother. Navarro recognizes that finalizing a trade deal with the EU is quite complex, possibly the most challenging one. Although President Trump often expresses frustration, talks are ongoing. The current deadline of August 1 might be extended if an agreement is still out of reach.

Key Market Theme

Mr. Navarro’s comments indicate continued friction and uncertainty in the US-EU trade relationship, which is a significant theme for the market. This prolonged negotiation process, deemed the “hardest one,” suggests an environment where volatility could increase unexpectedly. Derivative traders should prepare for sudden price swings instead of relying on a clear trend. The stakes are very high, with total US-EU trade exceeding $1.3 trillion in 2023, making it one of the world’s largest economic partnerships. Given this huge volume, sectors like German automakers and French luxury goods are especially at risk due to these discussions. Thus, purchasing protective put options on ETFs that track the DAX or CAC 40 indexes might be a smart way to safeguard against negative surprises.

Volatility and Opportunity

Navarro’s mention of the former president’s frustrations indicates that sharp, impactful statements could arise suddenly. In the past, during the 2018 trade disputes, the VIX index spiked above 20 following similar announcements, benefiting those who invested in volatility. We suggest buying VIX call options or futures ahead of known negotiation deadlines to profit from the expected anxiety. The ongoing tension will likely affect the EUR/USD currency pair, which is sensitive to political changes. The back-and-forth nature of the talks, with potentially extended deadlines, creates a turbulent environment. Traders might consider using options strategies like straddles to profit from significant price changes in either direction during a potential breakout. We should take advantage of the calendar by focusing on options expirations around key dates, such as the August 1 deadline. Even if this date is postponed, the weeks leading up to it will probably see heightened speculation and market activity. Structuring trades with weekly or monthly options enables a more tactical response to news from these challenging negotiations. Create your live VT Markets account and start trading now.

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