Why did European indices drop after the US-EU trade agreement?

European markets retreat after initial trade deal optimism fades

The Germany 40 (DAX 40) and FTSE 100 finished lower overnight, with European and United Kingdom (UK) stock markets reversing early gains after the initial excitement generated by the United States-European Union (US-EU) trade deal was replaced by disappointment.

Although the agreement reduces planned US tariffs on the EU from 30% to 15%, European leaders have voiced concerns about the economic impact of sustained tariffs. Additionally, there are worries about how the White House has so effectively used its economic and diplomatic leverage to secure significant investment and concessions for the US, at the expense of the EU.

US markets hit records as European stocks decline

If the reaction in equity markets in both the US and Europe is any guide, they seem to agree on who got the upper hand in the deal. US stock markets hit fresh record highs overnight, while the Germany 40 shed more than 1%. To add insult to injury, the EUR/USD plunged 1.30%, falling back to 1.1587, its heaviest fall since 12 May.

While tariffs on the EU are expected to weigh on growth, some offset may come from reports overnight that Germany is set to double its defence spending to €162 billion by 2029. . This increase is in response to Russian aggression and is expected to bring Germany’s defence spending to the 3.5% gross domestic product (GDP) target six years earlier than the 2035 deadline the North Atlantic Treaty Organization (NATO) leaders had targeted.

Eurozone GDP data in focus this week

Staying on the subject of growth, we are scheduled to receive eurozone (EA) second-quarter (Q2) GDP numbers tomorrow night and a EA inflation update on Friday night.

Eurozone Q2 GDP

Date: Thursday, 31 July at 10.00am BST

Last quarter (Q1 2025), GDP rose by 0.6%, up from 0.3% in the fourth quarter (Q4) 2024. This allowed the annual rate of growth in Q1 to increase by 1.5% year-on-year (YoY), its strongest rate of annual growth since Q4 2022.

Among the EA's largest economies, German GDP was flat, snapping a run of six consecutive quarters of negative GDP. Growth was recorded in France (+0.6%), Italy (+0.7%), Spain (+2.8%), and the Netherlands (+2%).

For Q2 2025, GDP in the EA is expected to come in at 0.0%, which would cause the annual rate of growth to ease to 1.2% from 1.5% previously.

At the European Central Bank's (ECB) interest rate meeting last week, the ECB kept rates on hold at 2% after seven consecutive cuts. The press conference took on a hawkish tone, raising the bar for a rate cut in September. Weaker-than-expected GDP data and inline inflation figures this week could re-energise the market's expectations of a rate cut in September, which is currently only assigned a 16% chance.

FTSE 100 technical analysis

From its record high of 8908 in March, the FTSE 100 fell 1364 points to a low of 7544 in early April, before completing its remarkable recovery and pushing to a fresh record high earlier this month.

The daily reversal/loss of momentum candle that formed overnight does warn that the rally in the FTSE 100 is mature and that it may be setting up for a deeper pullback.

Our confidence in this view would increase on a break of short-term support at 9050 and in this instance, we would expect to see retest of support at 8910 - 8900 coming from a double top formation in March and June of this year.

Aware that a sustained break below support at 8910 - 8900 would likely see a deeper pullback towards support at 8750 - 8700.

FTSE daily chart

Germany 40 technical analysis

In mid-May the Germany 40 burst above the double top at 23,746 from March this year, before hitting a record high of 24,639 earlier this month.

Since then, it has been consolidating its gains and working off overbought readings, largely in a 500-point range between 24,500 and 23,900.

If the Germany 40 was to see a sustained break of recent range lows at 23,900, it would likely signal that a deeper decline is underway initially back to the double top at 23,450 area.

Aware that a sustained break of support at the 23,450 area would open the way for a deeper decline back to the June low at 23,051.

Germany 40 daily chart

• _{Source: TradingView. The figures stated are as of 29 July 2025. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}