EUR/USD recovers early losses as Iran expresses willingness for truce

EUR/USD recoups its early losses and rebounds to near 1.1625 amid easing US-Iran tensions.
Iran expresses willingness to give up its nuclear program if the US offers a rewarding offer.
Dovish Fed bets for the July meeting have diminished after upbeat US data.

Sagar Dua FXStreet

The EUR/USD pair claws back a majority of its early losses and rises to near 1.1625 during the European trading session on Thursday, but is still marginally down. The major currency pair bounces back as demand for safe-haven assets has diminished, following comments from Iran Deputy Foreign Minister Saeed Khatibzadeh that it is willing to stop the war with Israel and the United States (US), giving up pursuing its nuclear plans, if Washington offers a rewarding offer.

“Iran is ready to abandon its nuclear program on the condition that the United States presents a rewarding alternative offer,” Khatibzadeh said, Sky News Arabia reported.

During the European trade, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.15% higher to near 99.00, but has surrendered a majority gains.

Meanwhile, receding dovish Federal Reserve (Fed) prospects due to upbeat US data are expected to continue supporting the US Dollar. The data showed on Wednesday that the ADP reported 63K fresh jobs were created in the private sector in February, significantly higher than 50K estimates and the prior reading of 11K. The Services PMI arrived higher at 56.1, while it was expected to come in lower at 53.5 from 53.8 in January.

According to the CME FedWatch tool, the odds of the Fed holding interest rates in the July meeting have increased to 50.2% from 37.9% seen on Tuesday.

In the Eurozone, Retail Sales drop 0.1% month-on-month (MoM) in January, while it was expected to grow 0.3%. In December, the consumer spending measure rose by 0.2%, revised positive from -0.5%.

(This story was corrected at 11:15 GMT to say in the second-last paragraph that the odds of the Fed holding interest rates in the July meeting have increased to 50.2%, not reducing rates.)

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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