The USD saw mixed movement following the recent US-EU trade agreement. The EURUSD dropped significantly, while the GBPUSD fell more modestly, stabilising after initial highs. The USDJPY increased as the dollar appreciated after the trade news.
The trade agreement was reached by President Trump and European Commission President Ursula von der Leyen, preventing a potential trade war before the August 1 deadline. Key points include a baseline tariff of 15% on many EU goods, quota systems for EU metal exports, and a commitment by the EU to purchase $750 billion in U.S. energy. A zero-for-zero tariff structure was agreed upon for some product categories.
Anticipated Import Figures
Anticipated import figures for 2024 reveal the EU’s proportion of U.S. goods imports is expected to be about 18.4%. Key contributors will include Germany with $160.4 billion, Ireland with $103.3 billion, and Italy and France with approximately $75.8 billion and $59.7 billion, respectively.
Notable upcoming events include the FOMC rate decision, US employment data release, and earnings reports from Meta, Microsoft, and others. Meanwhile, the U.S. stock market shows positive movement, with the S&P and NASDAQ indices increasing in premarket trading. In the debt market, U.S. Treasury yields are marginally up across various maturities.
We believe the immediate reaction to the trade agreement is a stronger US dollar, contrary to some initial headlines. The deal averts a trade war but imposes tariffs that weigh more heavily on the European economy, causing the EURUSD to fall. This dollar strength is the primary trend we should be monitoring in the coming days.
For the EURUSD, we are watching key technical levels like the 100 and 200-hour moving averages for signs of a continued breakdown. The new 15% baseline tariff on many European goods makes the euro fundamentally less attractive in the short term. We should consider strategies that benefit from further euro weakness, at least until the market fully digests the deal’s longer-term impacts.
Rise In USDJPY
The rise in USDJPY is a direct consequence of this dollar rally, further fueled by increasing US bond yields. As long as US yields remain firm, this pair is likely to continue its upward trajectory. Traders should watch the correlation between the US 10-year yield, which has climbed back over 4.4%, and this currency pair.
The policy divergence between central banks will likely amplify these currency moves. Officials like Mr. Kazimir indicate the European Central Bank is hesitant to act, whereas the US Federal Reserve is firmly in a “higher-for-longer” stance. Current data from the CME FedWatch Tool shows markets are pricing in over a 90% probability that the Fed will hold rates steady this week, reinforcing dollar strength against the euro.
This week is packed with event risk, creating a perfect environment for volatility. We anticipate market choppiness around the Fed’s interest rate decision on Wednesday and the US employment report on Friday. Historically, implied volatility for short-term options rises into these major data releases, presenting opportunities for those positioned for sharp price swings.
Beyond macro data, earnings from major technology companies will be a huge driver of overall market sentiment. Strong results from names like Apple and Microsoft could boost risk appetite, but any signs of weakness could trigger a flight to safety, further strengthening the dollar. We should be prepared for sentiment to shift rapidly based on these corporate reports.
Given the packed calendar, we think buying volatility is a prudent strategy. The VIX, a key measure of expected stock market volatility, has recently been hovering around a relatively low level of 13, suggesting options are not overly expensive. This provides a cost-effective way to hedge or position for the significant price action we expect from this week’s data and earnings.
