EU President von der Leyen discussed the EU/US trade deal framework, stating it was the optimal agreement possible. The deal prevents the imposition of stacking tariffs and varying rates, with a 15% rate as a permanent ceiling.
The framework, believed to avert a potential trade war, excludes digital rules or technology regulation. While some believe Europe conceded in the negotiations, it is acknowledged that the US independently sets its trade rules.
Impact Of The Framework Deal
The framework deal is expected to result in higher tariffs compared to those under President Biden. Under Trump’s administration, tariffs have become central to US trade policy, affecting negotiations with countries like Japan, the EU, and China.
Earlier, it was reported that the Euro increased against the US dollar following the deal announcement. Alongside the EU agreement, the US and China plan to meet in Stockholm with a 90-day tariff pause extension anticipated.
Over the weekend, reports confirmed the US and China intend to extend the tariff pause by another 90 days. News of the EU deal included an agreement for the EU to purchase energy from the US at a 15% tariff rate.
Response To The Deal
We believe the immediate response should be to sell volatility. With the main tail risk of a trade war removed, implied volatility in EUR/USD options and on major European stock indices should fall from their recent highs. Historically, resolutions to trade disputes, like the 2020 Phase One deal with China, saw the VIX index calm significantly, and we expect a similar pattern here.
The initial spike in the euro is likely a short-term relief rally and presents a selling opportunity. The deal’s framework forces Europe to purchase US energy, which creates a structural, long-term demand for dollars. Given that the EU imported nearly half of its liquified natural gas from the U.S. last year, this dollar demand will act as a significant cap on any sustained euro strength.
This new tariff environment creates clear winners and losers for sector-specific plays. We would look at buying puts on European automakers, as a permanent 15% tariff will directly hit the profit margins on the more than €30 billion in vehicles Germany alone sends to the U.S. annually. Conversely, call options on major US energy exporters are now more attractive given their secured access to the European market.
The most important takeaway from the announcement by von der Leyen is what was not included: digital and tech regulation. This omission signals that the next major trade battleground will be over technology, creating future uncertainty for companies in that sector. Traders should anticipate renewed volatility in tech-heavy indices as this unresolved issue inevitably comes back into focus.
