Volatility Is Lurking – Here’s How to Trade It Smartly This Week

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Welcome back to your weekly market outlook. After a bank holiday pause in the UK, we re-enter the fray into a market landscape that continues to simmer with geopolitical tension and potential economic shifts. Trade politics heavily influence the narrative, particularly the unpredictable dance between the US and its major trading partners. However, this week also brings crucial economic data releases that could sway market sentiment and central bank expectations. Let's dissect the key themes and identify where the opportunities might lie.

Political & Economic Chessboard: Tariffs, Inflation, and Central Bank Divergence

The dominant theme remains the global trade environment, characterised by a confusing mix of breakthroughs and brinkmanship. The US-EU trade relationship is currently centre stage. President Trump’s threatened 50% tariffs on EU goods, initially slated for June 1st, have been postponed to July 9th following intervention from European Commission President von der Leyen. While this delay averted an immediate escalation, it does little to resolve the underlying conflict. Markets breathed a sigh of relief, but this reprieve feels fragile. Negotiations are reportedly being fast-tracked, but the potential for sudden reversals or new demands from the White House keeps uncertainty levels high. Key sticking points likely involve agricultural access, digital services taxes, and existing tariffs on steel and aluminium. The EU reserves retaliatory tariffs, targeting iconic US goods, which could be deployed if talks fail by mid-July. The outcome here – whether a comprehensive deal, a further delay, or an escalation – will have significant ripple effects across global equities, currencies, and commodities.

Simultaneously, the market continues to process the US-UK trade deal announced earlier this month. While hailed as historic, its immediate impact is somewhat limited. Reducing tariffs on UK cars and eliminating steel/aluminium tariffs are positive for those specific sectors. Still, the retention of a 10% baseline tariff on most goods and the vague promise of "preferential treatment" for UK pharmaceuticals leave many questions unanswered. We need more clarity on the specifics, particularly for the pharma sector, to gauge the long-term benefits. This deal is a step, but not a complete reset of transatlantic trade dynamics.

Against this backdrop, the economic calendar is poised to deliver critical insights. All eyes will be on Friday's US Personal Consumption Expenditures (PCE) Price Index for April. As the Federal Reserve's preferred measure of inflation, this release is paramount. A hotter-than-expected reading could reignite fears of persistent inflation and push back expectations for Fed rate cuts, potentially strengthening the dollar and pressuring equities. Conversely, a cooler reading might bolster the case for the Fed to ease policy, eventually supporting risk assets. This data point is especially crucial given the Fed's current "wait-and-see" approach, contrasting the Bank of England's recent decision to cut its Bank Rate to 4.25%. This divergence in monetary policy is a key factor influencing currency markets, particularly GBP/USD.

Other notable data points include the Eurozone CPI Flash Estimate (also Friday), which will provide insights into inflationary pressures across the bloc, and the second estimate of US Q1 GDP (Thursday). While GDP revisions are often minor, any significant change could impact growth expectations. European economic sentiment indicators (Tuesday) and the Fed's Beige Book (Wednesday) will offer further qualitative insights into economic conditions on both sides of the Atlantic.

Market Pulse: Reading the Technicals

The recent market action, reflected in the data I've analysed, shows indices and assets grappling with these conflicting signals:

• US Indices (S&P 500, Dow, Nasdaq): These indices benefited from the EU tariff delay but remain below recent highs. Trading volumes have been moderate, suggesting a degree of caution. Key support levels need to hold to maintain the recent upward bias. Tech giants like Apple (AAPL) and Microsoft (MSFT) have shown relative strength, but Nvidia (NVDA), facing Burry's short position and intense scrutiny, remains a focal point for market sentiment.

• UK FTSE 100: The FTSE has shown resilience, supported by the US-UK deal's impact on specific sectors and the BoE's rate cut providing some domestic stimulus. However, its fortunes remain tied to global risk appetite. Key levels to watch include resistance near recent highs and support established during the May consolidation.

• VIX: The volatility index has eased slightly from its recent peaks following the EU tariff delay, but remains elevated compared to historical averages. It's acting as a sensitive barometer of trade news. A sustained move below 15 might signal growing market confidence, while spikes above 20 indicate rising fear.

• Gold: The yellow metal is consolidating in a range roughly between $3200 and $3380. It's finding support from geopolitical uncertainty and central bank buying but seems hesitant to break higher without a clear inflationary catalyst. Friday's PCE data is likely to trigger its next directional move.

• Oil: Crude prices remain choppy, balancing potential demand impacts from trade wars against supply-side factors and geopolitical risks in the Middle East. Recent inventory data and OPEC+ commentary haven't provided a decisive catalyst, leaving prices sensitive to broader macroeconomic news.

• GBP/USD: The Cable reflects the policy divergence but has gained significant traction above 1.3450. It appears to be on a run above the recent break of the daily resistance. The pair will be susceptible to US PCE data and any shifts in UK economic performance relative to expectations.

Trading Opportunities & Strategies for the Week Ahead

Navigating this environment requires a blend of tactical agility and strategic patience. Here’s my updated playbook:

1. European Autos (BMW, VW, Mercedes) - Tactical Trade on Headlines

This remains a high-risk, headline-driven play. The delay offers breathing room, but uncertainty is the dominant factor.

• My Strategy: Focus on intraday or very short-term moves based only on confirmed, significant news regarding US-EU trade talks. Long entries on confirmed positive news (e.g., concrete deal progress) after the initial spike, looking for pullback entries. Short entries on confirmed negative news (talks stalling, new threats) after the initial drop, confirming the breakdown. Use 15m/1h charts for entry signals (e.g., consolidation breaks). Position size must be small (1-2% risk), stops tight (2-3%), and profits taken quickly (+3-5%). Avoid overnight holds.

2. GBP/USD - Fade Rallies / Range Play Pre-PCE

The BoE/Fed divergence and pre-data caution favour fading strength or playing the established range.

• My Strategy: Look for long entries on pullbacks riding the technical wave, especially on signs of consolidations after a sell-off, 5/15min time frames as the focus, ideally bouncing off pivot levels. Stop loss ~30 pips below entry or half the previous rally. Target swing highs as normal. Making sure these targets are 1.5/2 RR. Crucially: Drastically reduce or flatten exposure before Friday's US PCE release.

3. VIX - Hedging / Selective Fade

Volatility is likely to remain sensitive to news.

• My Strategy: Consider buying VIX calls or ETFs (VXX) as a small portfolio hedge (1-2%) if concerned about negative trade outcomes or a market pullback. Only consider shorting volatility (e.g., via SVXY) after a significant positive resolution and a clear spike-and-reversal pattern in the VIX, targeting quick gains (+5-10%) with tight stops. Understand ETF decay and futures contango/backwardation.

4. Gold - Post-PCE Breakout Strategy

Gold is likely waiting for Friday's inflation data.

• My Strategy: Stay sidelined until after the US PCE release. If PCE is hotter than expected, look for a confirmed long breakout above resistance. If PCE is cooler, look for a confirmed short breakdown below support. Confirmation means sustained price action on increased volume (e.g., daily close beyond the level). Position size 2-3%, stops $20-30 away from the breakout/breakdown level.

5. US Tech (Select Names) - Relative Strength Play

While broad market direction is uncertain, some tech names continue to show relative strength.

• My Strategy: Focus on large-cap tech stocks with strong balance sheets and less direct exposure to tariff impacts (e.g., MSFT, GOOGL). Look for entries on pullbacks to key moving averages (e.g., 20-day or 50-day EMA) or established support levels. Use standard position sizing (2-4% risk) with stops below recent swing lows. This is a medium-term hold contingent on the broader market not breaking down significantly.

Managing Risk in Uncertain Times

It's crucial to reiterate the importance of risk management in this environment. Headline risk is extremely high, particularly concerning trade policy. Unexpected tweets or announcements can trigger sharp, unpredictable market moves. Ensure you are using appropriate position sizing – smaller sizes are warranted for tactical, headline-driven trades. Always use stop losses and respect them. Consider reducing overall leverage. Diversification remains important, but be aware that major geopolitical events can cause high correlation across asset classes. Patience is also a virtue; sometimes the best trade is no trade, especially when awaiting key data releases like Friday's PCE.

Final Thoughts

This week requires vigilance. The temporary calm provided by the EU tariff delay could easily be shattered. Trade negotiations remain the wild card, capable of overriding technical setups. Friday's US inflation data is the week's main scheduled event risk and will be critical in shaping market expectations for the coming weeks.

Focus on high-probability setups, manage risk meticulously, and be prepared to react to unexpected developments. The opportunities are there for disciplined traders, but the potential for volatility demands respect.

Stay focused, stay disciplined, and let's navigate these choppy waters together.

Until next week,

Samuel Leach

www.samuelandcotrading.com