The recent US-EU trade deal includes a baseline of 15% tariffs and a commitment to purchasing US goods and energy. This is more favourable than the previously threatened 30-50% rates, though it mirrors past universal tariff discussions.
Markets are anticipating a subdued August, pending the release of results from a pharmaceutical trade investigation. Potential trade deals with Asia, Mexico, and Canada remain on the market’s agenda, and European politicians hope this new deal will spur business investments.
Upcoming Us Data And Market Predictions
Upcoming US data, such as jobs reports and GDP figures, could influence the dollar. The Federal Reserve is expected to maintain its stance on interest rates, reducing the likelihood of a September rate cut.
With the data calendar clearing soon, markets are predicting a quiet August. The dollar is anticipated to consolidate, potentially moving back towards the 98.50/99.00 range, depending on US data outcomes. The current one-week rates make the dollar less attractive as a funding currency.
We believe the more favourable US-EU trade terms reduce immediate tail risk for European equities. For instance, after the US suspended steel and aluminum tariffs in late 2021, the Euro Stoxx 50 index saw a period of stability. This precedent suggests selling out-of-the-money puts on European indices could be a viable strategy to collect premium.
Anticipating Lower Market Volatility
We anticipate a period of lower market volatility, which is a common trend for August. The CBOE Volatility Index (VIX) is currently trading near 13, which is below its historical average and supports the expectation of a quieter market. This environment is favorable for strategies that profit from time decay, such as selling iron condors on broad market indices like the S&P 500.
Strong US economic data will likely reinforce the central bank’s current policy stance. Recent reports showing Non-Farm Payrolls adding 272,000 jobs far exceeded expectations, making a September rate cut highly improbable. The CME FedWatch tool reflects this, pricing in over a 90% chance that rates will be held steady at the next meeting.
Given the solid economic indicators, we expect the US dollar to remain supported, making a significant decline below the 104 level on the DXY index unlikely. Traders could therefore consider selling short-dated put spreads on dollar-tracking ETFs to capitalize on this floor. The current interest rate differential continues to make the greenback an unattractive funding currency for carry trades.
