EUR/USD holds early losses near 1.1550 amid firm risk-off trade

EUR/USD trades sharply lower around 1.1550 as Iran conflicts continue to underpin risk-off trade.
Surging oil prices amid the Middle East war have weighed heavily on the Euro.
Investors await the US CPI data for fresh cues on the Fed’s monetary policy outlook.

Sagar Dua FXStreet

The EUR/USD pair holds onto Asian trade losses around 1.1540 during the European trading session on Monday. The major currency pair is under severe pressure as demand for riskier assets remains weak due to the intensified war in the Middle East involving the United States (US), Israel, and Iran.

S&P 500 futures are down almost 2% during the European trade, indicating a weak risk appetite of market participants. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.6% higher to near 99.50 as its safe-haven demand remains upbeat.

Meanwhile, surging oil prices due to Iran conflicts are also acting as a key drag on the Euro (EUR). Global energy prices have spiked significantly as the US and Israel, in a joint operation, struck several Iranian oil depots over the weekend.

Rallying global gasoline prices have prompted fears of higher consumer inflation expectations in the Eurozone, a scenario that would diminish households’ spending power.

In February, inflationary pressures in the old continent already grew at a faster-than-projected pace. Preliminary headline and the core Harmonized Index of Consumer Prices (HICP) arrived higher at 1.9% and 2.4% Year-on-Year (YoY), respectively.

In the US, investors will focus on the Consumer Price Index (CPI) data for February, which will be released on Wednesday. The inflation data is expected to influence market expectations for the Federal Reserve’s (Fed) monetary policy outlook.

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

Sagar Dua

FXStreet

Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.

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