Euro flirts with 1.1400 on risk-averse markets as Iran’s war escalates

EUR/USD dips to 1.1400 after rejection at 1.1460 on Friday.
The US Dollar appreciates across the board as hostilities in the Middle East escalate.
Iran closed the Strait of Hormuz, and Oil prices rise 4% adding pressure on the Eurozone economies.

Guillermo Alcala FXStreet

The Euro (EUR) depreciates moderately against the US Dollar (USD) on Monday, as escalating tensions between the US and Iran and the closure of the Strait of Hormuz dampened appetite for risk and boosted inflationary pressures at the week's opening.

The EUR/USD pair is trading at the 1.1400 area at the time of writing, after rejection at 1.1460 on Friday. Price action, however, remains within the last two weeks’ horizontal range, whose bottom is at the 1.1370-1.1380 area, but the weakening momentum indicators suggest that further downtrend is likely.

Renewed US-Iran hostilities hurt risk appetite

Investors are wary of risk at the week’s opening, as US and Iran ramped up their attacks over the weekend. The US targeted Iranian army sites on the southern coast, killing at least one person according to Iranian Media, while Tehran announced retaliatory attacks on US bases in Kuwait, Bahrain, Oman and Jordan.

The Iranian Islamic Revolutionary Guard Corps (IRGC) also affirmed that the Strait of Hormuz is closed. The US CENTCOM said that some ships have been escorted through the waterway, but this did not stop Oil prices from jumping more than 4% from last week’s levels, adding pressure on the Oil-importing Eurozone economies.

In the calendar on Monday, the focus will be on the speeches by European Central Bank (ECB) and Federal Reserve (Fed) officials. Later this week, the US Consumer Price Index (CPI) data for June and Fed Chairman Warsh’s testimony to Congress will provide the fundamental background for US Dollar crosses.

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

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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