Some economists argue tariffs protect domestic industries, while others caution about potential long-term price increases and trade wars. In light of the upcoming 2024 presidential election, President Donald Trump plans to utilise tariffs to bolster the US economy and intends to target Mexico, China, and Canada, which collectively represented 42% of US imports in 2024.
The Nature of Tariffs
Von der Leyen’s decision to pause the EU’s retaliatory actions for 90 days is neither an admission of weakness nor a commitment to lasting compromise—instead, it’s an invitation to reset the tone between the EU and the US, at least for now. We are likely witnessing a move designed to stop tensions from escalating ahead of wider elections on both sides of the Atlantic. The EU’s goal appears to be keeping the door open to negotiation without relinquishing policy leverage, particularly as external pressures mount.
That said, markets responded immediately. The euro-dollar pair jumped just above the 1.1070 mark, and notably, the move came with broader dollar softness and a sudden improvement in risk sentiment. It’s worth pointing out that such currency strength, particularly when politically driven, tends to behave in spurts rather than smooth trajectories. The extent to which the euro can build on these gains will now be tied to follow-through from Washington as much as Frankfurt.
Tariffs, by their nature, are not merely barriers but tools—sometimes blunt, sometimes surgical. They’re often used to adjust short-term imbalances, but they can backfire over longer time horizons. By design, they support local producers; by effect, they raise buyer costs and bring in uncertainty. That uncertainty can be especially challenging in markets that depend on forward-looking pricing models.
With attention shifting to Washington, we’re now entering a fresh cycle of policy statements laced with campaign motivations. Trump, by focusing on large trading partners like China, Canada, and Mexico—who accounted for nearly half of the US import base in 2024—is signalling a renewed intention to consolidate domestic economic favour through external pressure. For our purposes, the timelines here clash uncomfortably with expiry calendars and hedging strategies, especially for those running exposure through baskets or country-specific pairs.
Trade Measures and Market Dynamics
We are not in a vacuum here—any move towards tighter trade measures from the US will echo through volatility indexes, particularly in FX and commodities. Equally, EU counterparts might feel compelled to react, perhaps selectively targeting US sectors that rely on European exports. Either way, option premiums could begin to lift from here, especially over assets which straddle the US-Europe axis.
One point to track with care: the staggered nature of policy response. The EU’s 90-day pause gives us a window, not a resolution. That window will likely be filled with posturing, perhaps written down in leaked documents or floated via diplomatic channels. Markets usually price in action, but they also react to tone and timing. If no real movement towards negotiation becomes apparent within the first month, we may see implied volatility climb above averages—as traders front-load risk into summer contracts.
There’s also the dollar dynamic. Hawkish rhetoric—particularly if layered with tariffs—tends to overinflate the greenback, at least initially. That brings opportunity. Crosses such as USD/MXN or USD/CNH could display compression or breakout behaviour depending on bilateral developments. It becomes essential, then, to map not just direction, but probability distribution around potential tariff announcements or reversals.
The wider bond market might not react immediately to tariff headlines, but the knock-on effect on inflation expectations remains on the radar. Supply chain stress from new tariffs could force central banks into more defensive positions. That would alter rate differentials, especially in eurozone-dollar comparisons. Futures traders should stay alert to adjustment in short-dated instruments, particularly where bets have already priced in a dovish ECB or a pivoting Fed.
Some of us might also consider calendar spreads or straddles to temper exposure. The unpredictable nature of political pledges around tariffs—especially in campaigning cycles—pairs very poorly with concentrated directional exposure left unhedged.
Stay aware of WTO involvement and any cases brought forward during this pause. These proceedings, even before outcomes are known, can weigh on sentiment and affect not only equities but also sector-specific derivatives such as those linked to autos, aircraft, or raw materials.
In short, the next few weeks are unlikely to deliver calm despite the handshake from Brussels. There’s room for sharp turns depending on what comes from trade officials, especially from the US side. Option traders would do well to model a range of outcomes, laying in coverage skewed toward asymmetric responses, particularly around US import-sensitive sectors.
