GBP/USD drifts below 1.3550 as rising US-Iran tensions sour sentiment
- GBP/USD extends losses below 1.3550 from last Friday's highs at 1.3657.
- Rising tensions between the US and Iran are boosting the safe-haven US Dollar on Monday.
- Trump's plan to free vessels in Hormuz has put investors on their toes.
The Pound (GBP) reverses initial gains against the US Dollar (USD) on Monday and extends its correction from Friday’s highs above 1.3650, to session lows below 1.3550. Concerns about escalating tensions in the Middle East have hammered investors’ appetite for risk and are boosting support for the safe-haven USD.
The Iranian Fars news agency has reported that two missiles have impacted a US warship that ignored Iran’s warning and intended to pass the Strait of Hormuz. The report has triggered a wave of risk-aversion, sending the Oil price and the Greenback higher.
These events occurred after US President Donald Trump announced a plan to free vessels stranded in Hormuz, which would start on Monday. The announcement took investors by surprise and had already triggered a cautious response amid the complexity of the operation and the lack of details.
Tehran, in turn, has warned that any incursion by the US Military in Iranian waters would be considered a violation of the ceasefire and would be responded to with “full strength.”
In the macroeconomic front, the UK calendar is thin on Monday, while in the US, March Factory Orders is the only event worth mentioning, apart from the speech by the New York Federal Reserve (Fed) President John Williams.
Later this week, the US ADP Employment Change on Wednesday and, above all, Friday’s Nonfarm Payrolls (NFP), and a slew of Fed speakers throughout the week would add some context to the hawkish tilt of last week’s monetary policy meeting.
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
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.
