The EU’s trade chief recently announced that the new agreement with the US is just the beginning of efforts to reduce trade tensions. Working together is seen as more beneficial than getting into a trade war. There are ongoing efforts to ease tensions, especially since not all EU member states agree on the deal. The framework in place has reduced trade uncertainty, which helps prevent major conflicts. Looking ahead, more improvements are expected, creating a more stable trading environment.

Strategic Approaches To Market Volatility

According to Mr. Sefcovic, traders in derivatives should prepare for lower market volatility. The existing framework and ongoing negotiations lower the chance of a sudden trade war, which has historically led to sharp increases in volatility. This implies that selling options, which gain value from falling implied volatility, could be a good strategy in the coming weeks. The US-EU trade relationship, worth over $1.3 trillion in 2023, highlights the importance of reducing tensions. Any decrease in tariff uncertainty positively impacts the global economy. This overall stability supports the idea that market volatility, especially for European stocks, is likely to stay low or decrease further. Historically, the VIX index spiked above 25 during the US-China trade war in 2018 and 2019 when new tariffs were introduced. Now, we expect the opposite to happen, as reduced tensions should limit increases in volatility. Thus, we see this as a chance to profit from low volatility, as the worst-case scenarios have been largely eliminated.

Sector Specific Opportunities

This perspective is especially relevant for derivatives linked to export-heavy European sectors, like German automakers who rely on the US market. With the risk of auto tariffs currently low, implied volatility for indices like Germany’s DAX should decrease. There are opportunities in strategies that thrive on stability within these trade-sensitive stocks. The Euro Stoxx 50 Volatility Index (VSTOXX) has recently been near its yearly lows, around the 13-15 level, indicating a calm market. Mr. Sefcovic’s comments support this trend, suggesting that any brief spikes in volatility due to unrelated news could be good times to start new short volatility positions. The reduced friction in trade serves as a solid foundation for this outlook. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now

The EURUSD pair hasn’t risen much despite the US-EU trade deal. This is likely because traders are waiting to see what the tariff rates will be. While the USD has gained some strength recently, it hasn’t had a strong reason for the move. The market is stuck in a range as traders look for new developments that could create a lasting trend. The idea of “shorting the US dollar” is still popular, but it needs a strong trigger to change expectations about rate cuts. The US-EU trade deal has made things clearer for the euro. Some members of the European Central Bank (ECB) have taken a neutral position regarding future rate cuts. They want to see negative data before considering more reductions. Although the market thinks there’s a 65% chance of a rate cut in December, the ECB might keep rates steady due to the trade deal, recent easing measures, and fiscal plans.

Technical Analysis Highlights

Looking at technical analysis, the daily chart shows important support at 1.1575, which can affect price movements from both buyers and sellers. The 4-hour chart indicates a break in minor support at 1.1720, hinting at bearish sentiment related to trade updates. The 1-hour chart does not offer much new information, mainly showing resistance and support testing. Upcoming US economic data—like job openings, consumer confidence, GDP, and employment figures—could be triggers for market movement soon. We think the market is absorbing the news of the trade deal, which many expected. Recent data from CFTC shows that speculative short positions against the dollar are near multi-year highs. Therefore, the path of least resistance might point to a further USD rally. A short squeeze could increase any upward movement for the dollar. On the European side, officials are signaling a pause in further rate cuts. Recent comments from central bank members have pointed out that core inflation remains stubbornly high, above 5%. This feedback pushes back against market expectations for a rate cut soon. The likelihood of a December cut has dropped below 50% in the overnight index swap market, indicating that traders are reassessing the bank’s plans.

Bearish and Bullish Trading Strategies

For traders who are bearish, the old support level around 1.1720 is now a great opportunity. We suggest considering buying put options or opening short positions if the price revisits this area from below. This allows for a clear risk management zone, aiming for the crucial support level at 1.1575. On the other hand, patient buyers should closely monitor the 1.1575 level for signs of a bottom. If the price reaches this key support zone, we will look for bullish reversal patterns before buying call options. This strategy is safer than trying to buy while the price is falling and positions for a potential rebound toward cycle highs. The coming week features significant US economic data that will likely influence the next steps. We are keeping an eye on Wednesday’s FOMC decision and Friday’s Non-Farm Payrolls report, which are expected to show around 170,000 jobs added. Strong numbers could strengthen the dollar and push the pair toward lower support, while weak data might undermine bearish momentum. Historically, when the market becomes as one-sided as the current anti-dollar sentiment, even neutral data can cause sharp reversals. A similar situation occurred in late 2021 when crowded short positions were forced to adjust, leading to a sustained dollar rally. Therefore, traders should stay flexible, as the trigger for a significant move might not be easy to identify. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now

**UK Retail Sales Drop** Consumer spending continues to struggle, even with a slight improvement from a very poor reading last month. Sales have now fallen for ten consecutive months, highlighting a significant issue in the UK economy. This trend indicates that many households are facing serious financial pressure. Recent data from the Office for National Statistics backs this up, revealing that retail sales volumes are still 1.7% lower than their levels before the pandemic in February 2020. Although UK inflation has recently met the Bank of England’s target of 2% for the first time in nearly three years, it has not yet led to increased spending. This makes the situation challenging for the central bank. **FTSE 250 and British Pound Forecast** In light of these developments, we think it’s wise to buy put options on the FTSE 250 index over the coming weeks. This index reacts more closely to the domestic UK economy than the more global FTSE 100. Historically, during periods of weak domestic growth, like in the early 1990s and 2008, the FTSE 250 has performed poorly. The ongoing weakness in consumer spending also suggests a negative outlook for the British pound. We are exploring short positions in GBP/USD futures since the currency has had trouble maintaining values above 1.27 amid concerns about the economy’s strength. This ongoing economic weakness may push the Bank of England to hint at future interest rate cuts more aggressively than the markets currently anticipate. The uncertainty highlighted by Martin Sartorius, the principal economist at the Confederation of British Industry, indicates that market volatility could increase. He pointed out that disappointing sales figures are affecting many retailers. Therefore, we are also looking into strategies to take advantage of volatility in select consumer-discretionary stocks that are most vulnerable to this spending decline. **Create your live VT Markets account and start trading now.**

here to set up a live account on VT Markets now

ECB policymaker Kazimir has said there’s no urgent need for action right now because nothing has changed. He doesn’t see a risk of ongoing inflation falling below target and thinks risks aren’t moving downward. For Kazimir to take action, he needs to see clear signs that the labor market is weakening. Although the US-EU trade deal may reduce uncertainty, its effect on inflation is still unclear.

Easing Cycle Complete

Kazimir believes the easing cycle is over, but he might consider one last rate cut in December if negative data comes up. The market currently thinks there’s a 65% chance of a rate cut in December. With the trade deal expected to lower uncertainty, and given that ECB easing measures and fiscal expansion are underway, the ECB may be done with rate cuts for now. We think the market is misunderstanding the European Central Bank’s plans for the rest of the year. Kazimir’s comments suggest a high threshold for further rate cuts, indicating that the 65% likelihood of a December move is likely too optimistic. This gap between what officials are saying and what the market thinks offers a clear opportunity.

Market’s Misreading Of ECB Intentions

This view is backed by the latest economic figures, which don’t suggest the economy needs emergency support. The Eurozone’s unemployment rate stayed at a low 6.4% in July, showing no signs of the “unraveling” he mentioned as a requirement for action. Additionally, August’s initial inflation rate was 2.5%, well above the central bank’s target. With this information, we believe traders should expect the market to lower the odds of a December rate cut in the upcoming weeks. A straightforward approach is to sell December Euribor futures or enter short-term interest rate swaps to lock in a fixed rate. These strategies will profit if expectations for short-term rates increase as the chance of a cut decreases. We’ve seen this before, where the market gets ahead of itself in predicting central bank actions that policymakers aren’t ready for yet. For example, in late 2023, markets rapidly anticipated rate cuts in 2024, which were later delayed, leading to a sharp increase in short-term yields. A similar adjustment could happen now if the data stays strong. This perspective could also affect the euro; a less dovish central bank tends to strengthen the currency. Traders might consider buying short-dated EUR/USD call options, offering a limited-risk way to capitalize on a potential rally in the euro if the central bank signals it’s done with rate cuts for now. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now

Lawmakers in Europe are worried about the trade deal between von der Leyen and Trump. French Prime Minister François Bayrou criticized the deal, saying it moves away from protecting common interests. In Germany, Chancellor Merz supports the deal, but there is unhappiness at home. Industry leaders have called it “inadequate” and warned it could lead to economic problems.

Hungary and Italy’s Reaction

Hungarian Prime Minister Viktor Orban criticized von der Leyen’s handling of the deal, saying she is outmatched by Trump. In Italy, Brando Benifei, who leads the parliament’s committee on US relations, expressed his dissatisfaction and emphasized the need for careful review of the agreement. Many believe this deal is more about managing issues than providing real benefits for Europe. With the backlash from leaders like Bayrou, we expect to see higher market uncertainty in the weeks ahead. Europe’s main volatility index, the VSTOXX, is currently trading low around 14, making it cheap to buy protection against sudden market changes. We see this as a chance to purchase volatility derivatives before market sentiment worsens. The negative response from German industries and cautious comments from Benifei suggest potential challenges for European stocks. We think it’s wise to buy put options on major indices like the Euro Stoxx 50 and the German DAX. Historically, during the 2018 US-EU trade disputes, the DAX dropped more than 15%, showing how sensitive it is to trade tensions.

Currency and Economic Impact

Criticism from leaders like Orban can shake confidence in the euro, especially with a strong US dollar. Recent data shows the dollar index (DXY) gaining strength while the EUR/USD exchange rate is struggling to stay above 1.07. We will look at derivatives that benefit from a decline in the EUR/USD pair. The disagreement faced by Merz directly pressures Germany’s export-driven economy, which is already under strain. German factory orders unexpectedly fell by 0.4% when a rise was expected, highlighting ongoing industrial weakness. Therefore, we are considering bearish positions on specific stocks in the German automotive and manufacturing sectors. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now

The GBPUSD pair is close to an important support level as the market waits for key financial data and announcements. The US dollar has strengthened recently, although no clear reason for this increase has been found. The GBPUSD is currently trading within a narrow range, looking for direction. In the UK, data has been mixed: the Consumer Price Index (CPI) was higher than expected, while employment figures were weaker. There is an 87% chance of a 25 basis point cut in interest rates at the upcoming August meeting, with two rate cuts expected by the end of the year.

Technical Analysis Overview

On the daily chart, the GBPUSD is nearing support at around 1.3368, which is part of a significant head and shoulders pattern. Buyers might enter around this support level, while sellers may look for a drop toward 1.3140. The 4-hour chart doesn’t provide much information since the support hasn’t been reached yet. However, the 1-hour chart shows a slight downtrend, indicating bearish momentum. Sellers may find better opportunities around the trendline and at the 1.3452 level, while buyers will be looking for a rise to 1.36. Key upcoming events to watch for include US Job Openings and Consumer Confidence data, followed by the US Q2 GDP report, the FOMC rate decision, the PCE price index, and the NFP report in the coming days. This week brings significant risk with the Federal Reserve’s decision and the jobs report on the horizon. This situation suggests that buying options could be a smart way to manage risk during the expected volatility. Historically, the GBPUSD has seen sharp moves of over 100 pips within 24 hours of such announcements.

Market Strategies And Recommendations

For those betting on a stronger dollar, a break below the 1.3368 support level is crucial. With the latest U.S. Core PCE inflation staying steady at 2.8% and the last jobs report adding a solid 272,000 jobs, any hawkish surprise could trigger this movement. If the break happens, traders may consider buying put options or selling futures with a target near 1.3140. On the other hand, buyers might defend this key level due to a crowded short dollar trade. Even though UK inflation has recently met the central bank’s 2% target, strong wage growth creates challenges for rate cuts, potentially supporting the pound. Traders expecting a bounce could think about buying call options with strike prices above 1.3400, aiming for a move towards the 1.36 mark. With uncertainty before these upcoming events, a long straddle or strangle option strategy could be beneficial. This strategy involves buying both a call and a put option, allowing profit from a major price move in either direction. This approach bets that new data will push the market out of its current range. For effective risk management, it’s important to use the identified technical levels. For bearish positions, consider placing a stop-loss just above the minor downward trendline near the 1.3452 level. For bullish positions, the risk is defined clearly just below the major support level, preventing significant losses if a drop occurs. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now

The euro has fallen as traders rethink the US-EU trade deal. While an agreement was made to prevent the worst outcomes, it might not significantly boost the European economy. The EU has set a 15% tariff baseline, which looks good on paper but may not help much in improving economic conditions.

Market Reaction and Its Implications

Last week, Volkswagen reported disappointing Q2 earnings and lowered its full-year forecasts due to tariff issues. Even with the 15% tariffs in place, the outlook hasn’t changed much. German stocks gained initially but are now only up 0.4%, compared to a previous 1% rise in the DAX. The EUR/USD exchange rate dropped to 1.1680, falling below its 100 and 200-hour moving averages, indicating a bearish trend. Meanwhile, the dollar has strengthened: the USD/JPY rose 0.4% to 148.23, and the AUD/USD fell 0.7% to 0.6520. As the August 1 deadline approaches, the dynamics among countries are changing, putting more pressure on nations to resolve outstanding issues. Although the deals may not live up to Trump’s claims, other countries feel the heat to settle problems. We think the initial relief from the trade deal could mislead traders. The European economy’s ongoing weakness, now under a new tariff floor, suggests a negative outlook for Euro-denominated assets. This situation creates clear opportunities for those expecting a downturn.

Strategic Trading Decisions

Volkswagen’s troubles are not unique. Recent data shows the HCOB Germany Manufacturing PMI at 45.4, deep in contraction territory. This confirms that challenges in the industrial sector continue. Any small rallies in European equities or the Euro should be seen as chances to sell. In contrast, the US economy remains strong. Recent reports show an increase of 272,000 jobs, much higher than expected. This difference supports the dollar’s rise, making short positions on EUR/USD more appealing. The pair’s drop below key moving averages strengthens our bearish view. For derivative traders, buying put options on the Euro is a smart way to profit from its expected decline while managing risk. The technical outlook suggests a re-testing of lower support levels from earlier this year, indicating this downward pressure is just starting. This situation reminds us of the 2018 trade disputes that caused sudden spikes in market volatility. We recommend looking at long positions on volatility, possibly through VIX call options or straddles on the DAX index. The pressure on other countries before deadlines is a strong catalyst for market instability. The dollar’s broad rally, which pressures currencies like the Australian dollar, is likely to continue. This will impact commodity prices and emerging market currencies sensitive to global growth. As noted, the path of least resistance points towards a stronger dollar, and our strategies should reflect that. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now

The AUDUSD pair is experiencing volatility within an expanding wedge as the market searches for new drivers. The USD is gaining some strength but lacks clear support for a lasting trend. Traders are looking for developments on both sides to influence future movements. In Australia, the quarterly inflation report is a key focus. Markets expect a reduction of 58 basis points by the year’s end, with an 85% chance of a rate cut in August. Any unexpected inflation numbers could greatly change market expectations. Lower inflation could lead to bigger rate cuts, while higher figures might temporarily boost the AUD.

Technical Analysis Overview

In technical analysis, the daily chart for AUDUSD shows a rejection at the top trendline, targeting support at 0.6350. Buyers need to break through this trendline to aim for a rally at 0.6900. The 4-hour chart shows support around 0.6485, where buyers may step in, while sellers watch for a potential break towards 0.6350. On the 1-hour chart, a small downward trendline shows bearish momentum, giving sellers a favorable risk/reward. Buyers are looking for a break above this trendline to counter the bearish outlook. Upcoming events include US job data, consumer confidence, GDP, the FOMC rate decision, and other economic indicators that will affect AUDUSD movements. The critical Australian quarterly inflation report has just come in. Australia’s Q1 CPI data for 2024 was higher than expected at 3.6% year-over-year, surpassing the forecast of 3.5%. For derivative traders, this unexpected strength complicates plans based on an expected rate cut, making put options riskier now.

Market Reactions and Strategy Adjustments

After this report, market expectations for rate cuts by the Reserve Bank of Australia changed significantly. The previous 85% chance of an August rate cut has disappeared, with swaps markets indicating cuts are now unlikely until 2025. This sharp adjustment in policy suggests a solid reason to expect a higher exchange rate. Meanwhile, the US dollar faces a busy week of data, including the Federal Reserve’s policy decision. With recent comments from members like Powell indicating patience regarding rate cuts, it will take a considerable negative surprise in US data to weaken the USD further. Thus, we believe the path of least resistance for the pair may be upward in the near term. We should now view the technical outlook with this fresh fundamental perspective. A break above the upper trendline seems more likely, so buying call options with a strike price aimed at 0.6900 could be a smart strategy. Implied volatility is expected to rise as US data releases approach, so it might be wise to establish positions ahead of time. In terms of risk management, the minor support area around 0.6485 is crucial to watch. Historically, strong US job data, like the upcoming NFP report, can quickly change market sentiment and lead to a drop. Traders might consider this level to either take profits on long positions or buy protective puts to safeguard their investments. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now

Germany’s VDMA is worried about the US-EU trade deal, saying it might cost German carmakers a lot each year. They highlight that Trump’s tariffs already hurt companies like Volkswagen. Volkswagen had weak earnings in Q2, in part because of these tariffs. While the new tariffs might not be as harsh, they’re still set to impact the future of Germany’s car industry.

Concerned Outlook for the German Automotive Sector

The warning from the industrial group supports our cautious view on the German automotive sector. We think traders should consider buying put options on major players like Volkswagen, BMW, and Mercedes-Benz. This strategy allows for managed risk while trying to profit from the expected downturn as trade challenges persist. This negative sentiment isn’t just isolated; it could hit the broader German market. The latest Ifo Institute survey shows the business climate index for the automotive sector dropped to -15.2, indicating serious worries about the future. Therefore, we’re also considering shorting DAX futures as a way to protect against a market downturn affecting the most important industry.

Opportunity with Rising Volatility

In addition to directional bets, this situation calls for action on rising volatility. Germany’s volatility index, the VDAX-NEW, has been stuck at a low 16, which we believe underestimates the risk of sudden US policy changes. We see this as an opportunity to buy long-term straddles on automakers, which can benefit from significant price changes in either direction. We’ve seen this happen before during the 2018-2019 trade disputes, which caused German auto stocks to plummet due to tariff threats. The US is still a vital market, importing over €30 billion of German cars each year, according to the latest Destatis figures. This history along with current data suggests that taking protective measures is the smartest move in the upcoming weeks. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now

US-China trade talks are set to begin in Stockholm at the Rosenbad government office. The goal is to extend the current 90-day trade truce between the two countries. Both nations want to avoid raising tariffs while working toward a comprehensive agreement. However, progress seems limited as China has shown its power by restricting rare earth mineral exports to the US.

Market Volatility Expectations

With the talks happening in Stockholm, we can expect increased market volatility. Any news, whether good or bad, could lead to quick price swings. For example, during the August 2019 tariff escalation, the VIX, which measures expected volatility, spiked over 40% in just one week. We should be ready for similar reactions. China’s control over rare earth minerals poses a significant threat. These materials are essential for technology and defense industries, including everything from smartphones to missile guidance systems. It may be wise to consider buying protective put options on semiconductor ETFs or key tech companies with vulnerable supply chains. The potential for a 90-day extension creates a complex situation. The immediate crisis may be avoided, but the underlying tension will still exist. This could lead to a “range-bound” market with sporadic fear spikes. In this kind of environment, strategies like selling iron condors on broad market indices can be effective, allowing us to profit when the market stays within a predicted range.

Rare Earth Export Decline

China’s official data reveals that rare earth exports already dropped 7.2% in August compared to the previous year. This is a serious concern. We can use this information to set up calendar spreads by selling short-dated options to capture the expected “status quo” premium while holding longer-dated options as protection. This strategy allows us to benefit from the current calm while guarding against any sudden issues in the talks. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now