Euro slumps below 1.1600 against US Dollar amid fears of US-Iran war resumption

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The Euro (EUR) slides 0.3% to near 1.1590 against the US Dollar (USD) during the Asian trading session on Thursday.

EUR/USD declines to near 1.1590 as Iran’s retaliation against US attacks near Bandar Abbas has dampened market mood.
The IRGC attacks US military bases and threatens a more decisive response if it attacks again.
Investors await the US-Germany inflation data.

The Euro (EUR) slides 0.3% to near 1.1590 against the US Dollar (USD) during the Asian trading session on Thursday. The major currency pair faces intense selling pressure as market sentiment turns risk-averse, following Iran’s retaliation against United States (US) attacks near Bandar Abbas airport, Tasnim agency reported.

As of writing, S&P 500 futures are down 0.3% below 7,500, reflecting a sharp dent in investors’ risk appetite. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, jumps over 0.3% to near 99.53.

Earlier in the day, the Fars News Agency reported that three explosions were heard east of Bandar Abbas and air defenses were activated for several minutes.

In response, Iran’s Islamic Revolutionary Guard Corps (IRGC) has attacked US military bases and has threatened 'a more decisive' response if Washington attacks again.

The exchange of attacks between both nations has dented optimism towards a permanent deal. Earlier this week, US officials, including President Donald Trump, expressed confidence that a deal could be announced soon.

Meanwhile, investors await the US Personal Consumption Expenditure Price Index (PCE) data for April and the preliminary German Harmonized Index of Consumer Prices (HICP) data for May, which will be released on Thursday and Friday, respectively.

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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