EUR/GBP steadies near 0.8650 as traders adopt caution on Middle East conflict

EUR/GBP remains calm after paring daily losses on Monday.
Risk aversion rises as Middle East tensions escalate after Trump’s 48-hour ultimatum to Iran over the Strait of Hormuz.
ECB highlighted rising inflation risks and a weaker growth outlook, with rising rate hike odds later this year.

Akhtar Faruqui FXStreet

EUR/GBP pares its daily losses and is hovering around 0.8670 during the Asian hours on Monday. The currency cross opened at a gap down as the Euro (EUR) faces struggles amid increased safe-haven demand due to increasing Middle East tensions.

US President Donald Trump has reportedly issued Iran a 48-hour ultimatum to reopen the Strait of Hormuz or face potential strikes on its energy infrastructure. Moreover, reports suggest Washington is considering a ground operation to seize Iran’s Kharg Island, a key oil export hub. Iran’s Islamic Revolutionary Guard Corps (IRGC) warned it would fully shut the strait if the US proceeds, while Tehran threatened to target US and Israeli assets across the region, including energy, IT, and desalination facilities.

However, the Euro could find support as surging oil prices stoke inflation concerns and reinforce the European Central Bank (ECB) hawkish bias. The ECB kept rates unchanged at last week’s meeting, noting that the Iran conflict has made the outlook “significantly more uncertain.”

ECB officials flagged “upside risks to inflation and downside risks to growth,” prompting traders to raise bets on potential central bank rate hikes later this year. Policymakers are set to speak on Monday, and any hawkish remarks may further support the Euro against its peers.

The Pound Sterling (GBP) may also strengthen against its major peers as the Bank of England’s (BoE) outlook points to an extended pause, with some analysts eyeing possible rate hikes in 2026. The BoE held rates steady at 3.75% at its March meeting, in line with expectations.

BoE Governor Andrew Bailey warned that the Middle East conflict could deliver an economic “shock,” lifting inflation in the near term, and stressed that restoring safe shipping through the Strait of Hormuz is crucial to easing energy price pressures. UK Prime Minister Keir Starmer, Finance Minister Rachel Reeves, and Governor Bailey are scheduled to attend an emergency meeting on Monday to assess the economic impact of the Iran conflict.

Risk sentiment FAQs

What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?

In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.

What are the key assets to track to understand risk sentiment dynamics?

Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.

Which currencies strengthen when sentiment is "risk-on"?

The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.

Which currencies strengthen when sentiment is "risk-off"?

The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.

Author

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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