The euro declined as traders reacted negatively to the US-EU trade deal. The EU’s agreement included maintaining a list for 0% tariffs but still faced 15% baseline tariffs, affecting the European economy.
German industry leaders and French officials are questioning the deal’s implications, while US-China trade talks are set to resume. Meanwhile, the Bank of England and policymakers worldwide monitor these developments, with the ECB seeing no need for immediate action in September.
Market Reaction
Data shows the UK CBI retail sales improved to -34 from -46. In markets, the US dollar strengthened while the euro weakened, with EUR/USD decreasing. USD/JPY and USD/CHF also rose, reflecting dollar strength.
European equities opened higher, but gains were reduced; the DAX climbed 0.1% and the French index halved its initial increase. US futures also saw early gains decrease, rising by just 0.2%.
Oil and gold prices remained stable, while Ethereum edges closer to testing the $4,000 mark. Bitcoin fell 0.7% to $118,621. The week ahead includes significant events such as tech earnings reports, various central bank meetings, and the US labour market report.
Investment Opportunities
Based on the fading optimism surrounding the US-EU trade pact, we believe the path of least resistance for the euro is lower. The political backlash against the deal, which still includes a 15% baseline tariff, suggests economic headwinds for the Eurozone. We see this as an opportunity to purchase put options on the EUR/USD, anticipating a slide towards the 1.1500 level in the coming weeks.
With equity markets paring their initial gains, we anticipate a rise in volatility. The CBOE Volatility Index (VIX), often called the market’s “fear gauge,” is currently hovering around a relatively low 13.5, but historically it spikes during weeks with multiple central bank decisions and major tech earnings. We think buying VIX call options or establishing straddles on indices like the S&P 500 is a prudent way to position for the expected price swings.
The dollar’s broad strength, particularly against commodity currencies, is a key trend to follow. The US Dollar Index (DXY) recently climbed above 106, a multi-month high, putting significant pressure on pairs like the AUD/USD. Given this momentum, we are considering selling AUD/USD futures ahead of the US labor market report, as a strong number would likely fuel further dollar appreciation.
The divergence in central bank outlooks provides a clear trading signal. As stated by Mr. Kazimir, the European Central Bank feels no immediate pressure to act, while CME FedWatch Tool data shows markets pricing in a hawkish tone from the Federal Reserve. This policy gap, reflected in rising US 10-year yields, reinforces our long-dollar stance against currencies with more dovish central banks.
