The German economic minister states that the EU is negotiating from a weak position and needs to change this. New tariffs pose a large burden, and the US’s commitments from Sunday will be closely evaluated.
There is uncertainty about how much of the $600 billion investment in the US will impact Germany. The US Commerce Secretary remarked that Trump excelled in negotiations with the EU and believes the EU will eventually see the benefits of the deal.
Based on the view that the EU is negotiating from a position of weakness, we see a clear signal of trouble for European assets in the coming weeks. The uncertainty surrounding US tariffs creates a negative outlook for the Euro. We anticipate continued pressure on the EUR/USD exchange rate, which has already fallen 3% in the last quarter to trade near 1.0550.
This sentiment is backed by Germany’s own economic data. The latest Ifo Business Climate Index, released last week, fell to 87.3, marking its lowest point in over a year and signaling a contraction in business expectations. These new tariff threats will only worsen this outlook for Germany’s export-heavy economy.
For derivative traders, this points toward a defensive or bearish strategy on European markets. The uncertainty will likely increase volatility, making options more expensive but also more valuable as a hedge. We are considering buying put options on the DAX index to protect against a potential downturn driven by trade worries.
Historically, we have seen this pattern before during the initial tariff announcements in 2018. Markets reacted with sharp increases in volatility, and currencies of trade-dependent nations weakened significantly against the US dollar. We expect a similar, if perhaps more muted, reaction this time as markets digest the potential impact.
The latest Commitment of Traders report supports this view, showing large speculators have increased their net short positions on the Euro for the fourth consecutive week. This indicates that major market players are already positioning for further downside. We believe following this trend is the prudent move for now.
