Insights 
VT 
EUR/USD remains near 1.1650 as the US Dollar strengthens due to optimism about US-China trade discussions. Officials from the US and China are scheduled to meet in Malaysia to continue negotiations, following recent tariff escalations.
The Euro is under mild pressure against the US Dollar, with EUR/USD trading above 1.1650 while the US Dollar Index is at 98.50 after a recent rise. ECB’s Isabel Schnabel warns of the Eurozone’s lag in the digital sphere and productivity compared to the US, citing increased energy costs and shrinking export markets.
Potential Outcomes of US-China Trade Talks
US-China trade talks may ease short-term market concerns, yet uncertainty persists due to US President Donald Trump’s warnings of potential 155% tariffs by November 1 if no agreement is reached. Meanwhile, the Dollar’s potential gains are restrained by a dovish Federal Reserve and an ongoing government shutdown.
The US government shutdown has lasted three weeks, as Congress attempts to pass a short-term funding bill. The Dollar shows mixed performance against major currencies, with the Canadian Dollar experiencing the most substantial movement, down by 0.34%.
Given the high uncertainty surrounding the US-China trade talks, we believe traders should consider buying volatility ahead of the November 1st deadline. Options strategies like straddles on EUR/USD, which profit from a large price move in either direction, could be effective. We remember the sharp market swings during the 2018-2020 trade disputes, and this situation feels similarly unpredictable.
Strategic Considerations for Traders
The underlying weakness in the Euro, highlighted by the ECB’s concerns over competitiveness, suggests a bearish bias. This view is supported by recent data showing the Eurozone’s flash manufacturing PMI has remained in contraction territory below 48.5 for over a year. Therefore, buying EUR/USD put options or establishing put spreads to lower costs could be a prudent way to position for potential downside.
However, a simple long US Dollar position is risky due to the dovish Federal Reserve outlook and the ongoing government shutdown. This contrasts with the aggressive rate-hiking cycle we saw end in 2024, which previously supported the dollar. These domestic headwinds could cap any significant upside for the greenback, even if a trade deal is reached.
The current implied volatility for EUR/USD is relatively low, making options cheaper than they were during previous periods of stress. Historically, during similar tariff escalations in 2019, currency volatility indices spiked by over 25% in a matter of days. A failure to secure a deal this time could easily trigger a similar, or even larger, jump in volatility.
Considering the US Dollar Index is already elevated near 98.50, traders could hedge against a sharp reversal. Selling out-of-the-money EUR/USD call options against long put positions can create a risk-reversal. This strategy cheapens the cost of downside protection on the Euro while defining the risk if a surprise trade deal causes the pair to rally sharply.
