Last Sunday, July 27, came what seemed like good news: Washington and Brussels had reached a preliminary agreement on a trade deal that includes a 15% tariff on most imported goods, including automobiles, semiconductors, and pharmaceuticals. Before that, the U.S. planned to impose up to 30% tariffs.
In return for this supposed act of goodwill from Donald Trump’s administration, the EU pledged to increase purchases of U.S. energy products by $750 billion over the next three years or $250 billion a year, up from around $76 billion. The agreement also includes EU investments in the U.S. totaling $600 billion.
Markets initially responded with enthusiasm: both the European Stoxx 600 and the S&P 500 opened higher on Monday. However, by the end of the session, much of the initial optimism had faded, with prices tumbling. The EUR/USD pair sank 1.3% following the news, pulling away from its four-year high. And it was not just the usual “buy the rumor, sell the fact” move, in which investors cash in once the expected news drops.
Nor was it the renewed geopolitical tensions after Trump abruptly shortened the deadline for Russia to end the war in Ukraine from the previously stated 50 days to just 10 to 12 days, or after his revived threats to launch another round of strikes against Iran's nuclear facilities, that dampened momentum.
The real reason the green candles changed to red was that investors began to realize that the “pre-agreement” between the US and the EU is simply unrealistic. And the issue is not just skepticism about whether Europe will deliver on its promises, but that the agreement is virtually impossible to implement.
This is especially true for energy purchases. In 2024, total U.S. energy exports worldwide amounted to $318 billion, of which the EU imported only $76 billion. For the EU to meet its promise of $250 billion a year, the U.S. must divert almost all its energy exports to Europe, leaving the rest with practically nothing.
The problem is that Japan has just signed its own trade agreement with the U.S., which also includes a surge in energy imports. This increased demand for U.S. energy could raise benchmark prices and incentivize U.S. producers to prioritize exports over domestic supply. This, in turn, could drive up U.S. energy prices.
Why did European Commission President Ursula von der Leyen make such a bold promise?
She seems to have followed the same script as Japan and some Arab countries: promises of multi-billion-dollar investments without much clarity on how they will be realized. At the moment, it's all talk. So it is still too early to say that the risk of trade wars is behind us or their drag on the economy is done.