From Dusk to Deal

July 28, 2025
  • The US and EU agreed on the contour of a trade deal. EUR initially jumped before plunging.
  • USD is up across the board while most equity markets are rallying.
  • Today’s light on data, but the rest of the week is jam-packed. Check-out our Drivers for the Week.

Just a heads up: I’ll be on a roadshow in Germany this week, so the daily strategy note may not be published every day.

Trade deal optimism has boosted financial market risk appetite. Futures point to new all-time highs for US equity markets while European stock markets are powering forward. Interestingly, USD, which typically underperforms in a risk-on environment, is gaining grounds. Expectations for higher EU investment in the US could be contributing to USD strength. But as we argue below, the USD upswing will be hard to sustain.

The US and EU agreed on the contour of a trade deal:

(i) Most EU goods exports to the US will be charged a baseline tariff of 15%. That’s up from 10% since April 2 and about 1.2% before President Donald Trump’s presidency, but below the previously threatened 30% levy.

(ii) Zero tariffs will apply to select sectors. Aircraft and their parts, semiconductors, chemicals, agriproducts.

(iii) US tariffs on EU steel and aluminum remain at 50%.

(iv) The EU agreed to purchase $750 billion in American energy products during Trump’s term, purchase “vast amounts” of military equipment, and increase its investment in the US by more than $600 billion above current levels. For reference, EU foreign direct investment in the US totaled $2.37 trillion in 2024.

In our view, the USD tailwind from the expected rise in investment by the EU in the US should be offset by both countries aim at rebalancing cross-border trade flows. Specifically, the goal to narrow the US trade deficit with the EU means fewer dollars will flow to the EU, reducing the need for those funds to be recycled back into US long-term securities (treasury bonds & notes, corporate bonds, equities, gov’t agency bonds).

Meanwhile, the US-EU trade deal reduces downside risk to Eurozone economic activity and reinforces the case for the ECB to stay on hold. There is room for the swaps curve to shift higher in favor of EUR, as current pricing implies about 80% odds of a 25bps ECB rate cut in the next 12 months. Bottom line: the ECB’s pause, coupled with political pressure on the Fed to ease, will continue to underpin the EUR/USD uptrend. We see EUR/USD carving-out a bottom around 1.1500.

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