EUR/USD rallies on US-Iran optimism, upside capped by lingering uncertainty

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EUR/USD trades higher on Wednesday as renewed optimism surrounding a potential US-Iran peace deal pressures the US Dollar (USD) and lifts the Euro (EUR).

EUR/USD rises as hopes for a potential US-Iran agreement weigh on the US Dollar.
Softer Oil prices ease inflation concerns and pull US Treasury yields lower.
Stronger-than-expected US ADP jobs data and lingering geopolitical uncertainty help limit US Dollar losses.

EUR/USD trades higher on Wednesday as renewed optimism surrounding a potential US-Iran peace deal pressures the US Dollar (USD) and lifts the Euro (EUR). At the time of writing, the pair is trading around 1.1750, up nearly 0.50% on the day after hitting an intraday high of 1.1796, its highest level since April 16.

Market sentiment improved after Axios reported that Washington and Tehran are moving closer to a potential agreement aimed at ending the war and establishing a framework for detailed nuclear negotiations.

The report said the proposed deal could include Iran pausing nuclear enrichment, while the US would lift sanctions and release billions of Dollars in frozen Iranian funds. Both sides are also expected to end the blockade around the Strait of Hormuz.

Following the report, Oil prices plunged, pushing US Treasury yields lower as the sharp decline in crude Oil helped ease concerns over energy-driven inflation and reduced pressure on the Federal Reserve (Fed) to tighten monetary policy. Traders also shifted back toward pricing in the possibility of Fed rate cuts by year-end, reversing earlier expectations that the central bank may need to keep rates higher for longer.

However, gains in EUR/USD remained capped as uncertainty surrounding the negotiations continued to linger. US President Donald Trump warned that military action could resume if Iran does not agree to the deal, while Iran’s ISNA News Agency reported that parts of the Axios story were “speculation” and described the US proposal as containing “ambitious and unrealistic” demands.

This lingering uncertainty helped the US Dollar stabilize after its earlier decline. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 97.98 after touching an intraday low of 97.62.

On the data front, the US ADP Employment Change report showed private sector payrolls increased by 109K in April, up from 61K in March and beating market expectations of 99K, offering additional support to the Greenback.

Meanwhile, traders also digested comments from St. Louis Fed President Alberto Musalem, who said inflation remains “meaningfully above target” and warned that “underlying inflation” still requires attention beyond tariff and Oil-related shocks. Musalem added that inflation risks are rising and said “plausible scenarios” could require interest rates to remain steady for a period.

Looking ahead, traders remain focused on further developments surrounding the US-Iran negotiations, while attention also turns to upcoming US labor market data, including weekly Jobless Claims on Thursday and the Nonfarm Payrolls (NFP) report on Friday.

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.