EUR/JPY rises above 182.50 as Iran war resolution hopes grow

EUR/JPY rises as risk aversion eases after reports US Energy Secretary Chris Wright expects the Iran war to end within weeks.
Rising oil prices highlighted Europe’s vulnerability to higher energy costs and potential trade balance deterioration.
Traders expect that Japanese authorities may intervene in the foreign exchange market to curb the JPY’s weakness.

EUR/JPY gains ground after two days of losses, trading around 182.60 during the Asian hours on Monday. The currency cross advances as the Euro (EUR) gains support against its peers after The Guardian reported that US Energy Secretary Chris Wright expects the US-Israel conflict with Iran to end within “the next few weeks,” potentially allowing oil supplies to recover and energy prices to ease.

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However, the EUR/JPY cross’s upside may remain limited as the Euro continues to face pressure from rising oil prices, underscoring Europe’s vulnerability to higher energy costs that could weigh on the region’s trade balance. The recent surge in energy prices has led money markets to price in two European Central Bank rate hikes this year, a sharp shift from last month, when no policy moves were anticipated.

French President Emmanuel Macron said on Sunday that freedom of navigation through the Strait of Hormuz must be restored as soon as possible. Macron also urged Iran’s president to immediately halt what he described as unacceptable attacks against countries in the region, including Lebanon and Iraq.

Traders are now focusing on the ECB’s upcoming policy meeting, where President Christine Lagarde is expected to outline how the central bank intends to address inflationary pressures linked to the conflict.

Meanwhile, the EUR/JPY cross could face additional headwinds as the Japanese Yen (JPY) finds support on expectations of potential foreign exchange intervention by Japanese authorities. Finance Minister Satsuki Katayama said the government is closely monitoring currency movements and stands ready to take strong action if necessary.

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.

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