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EUR/USD plunges below 1.1600 as US Dollar rallies amid risk-aversion mood

  • EUR/USD slides below 1.1600 amid risk-off mood due to escalating US-Iran war.
  • Receding dovish Fed bets have also strengthened the US Dollar.
  • Both the Eurozone headline and the core HICP rose at a faster-than-expected pace in February.

The EUR/USD pair plummets 0.85% to near 1.1585 during the European session on Tuesday, and seems on track to test its three-month low of 1.1575. The major currency pair faces severe selling pressure as the US Dollar (USD) extends its advance amid risk-off market sentiment due to the escalated war between the United States (US), Iran, and Israel.

The war situation in the Middle East has increased the safe-haven demand for the US Dollar.

At the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.8% higher to near 99.40, the highest level seen in over a month. S&P 500 futures trade almost 1.5% lower, indicating weak appetite for riskier assets.

US Dollar Price Today

The table below shows the percentage change of US Dollar (USD) against listed major currencies today. US Dollar was the strongest against the New Zealand Dollar.

USDEURGBPJPYCADAUDNZDCHF
USD0.81%0.86%0.36%0.27%0.97%1.03%0.91%
EUR-0.81%0.05%-0.44%-0.53%0.17%0.23%0.10%
GBP-0.86%-0.05%-0.52%-0.58%0.09%0.17%0.05%
JPY-0.36%0.44%0.52%-0.08%0.61%0.66%0.55%
CAD-0.27%0.53%0.58%0.08%0.69%0.75%0.63%
AUD-0.97%-0.17%-0.09%-0.61%-0.69%0.06%-0.07%
NZD-1.03%-0.23%-0.17%-0.66%-0.75%-0.06%-0.11%
CHF-0.91%-0.10%-0.05%-0.55%-0.63%0.07%0.11%

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).

Earlier in the day, Tehran launched a series of drone attacks on the US Embassy in Riyadh, as part of their retaliation for Washington and Israel, in a joint operation, killing Iran’s several top leaders, including Supreme leader Ayatollah Ali Khamenei.

In addition to the risk-off impulse, receding dovish Federal Reserve (Fed) expectations for the June policy meeting have also strengthened the US Dollar. The CME FedWatch tool shows that the probability of the Fed holding interest rates steady in the June policy meeting has increased to 53.5% from 42.7% seen on Friday.

Traders have pared dovish Fed bets after the release of the US ISM Manufacturing PMI report for February on Monday, which showed signs of accelerating factory-level inflation. The report showed that Manufacturing Prices Paid – which tracks changes in prices paid for inputs such as labor and raw materials – soared to 70.5 against estimates of 59.5 and the previous reading of 59.0.

In the Eurozone, preliminary Harmonized Index of Consumer Prices (HICP) data for February have come in stronger-than-expected.

During European trading hours, the Eurostat reported that the headline HICP arrived at 1.9% Year-on-Year (YoY), higher than estimates and the February reading of 1.7%. Also, the core inflation – which excludes volatile components like food, energy, alcohol, and tobacco – rose at a faster pace of 2.4% vs. estimates and the prior release of 2.2%.

Risk sentiment FAQs

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.

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.

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.

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

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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