EUR/JPY trades near 185.00 after paring recent gains

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EUR/JPY remains in the positive territory after paring its daily gains, trading around 185.20 during the Asian hours on Wednesday. The currency cross trims intraday gains as the Japanese Yen (JPY) strengthens on falling oil prices after the US-Iran ceasefire.

EUR/JPY trims gains as Japanese Yen strengthens on falling oil after US-Iran ceasefire.
Lower oil costs ease Japan’s imported inflation, reducing price pressures and simplifying the BoJ’s policy outlook.
Trump agreed to a two-week ceasefire with Iran, conditional on reopening the Strait of Hormuz.

As a major net energy importer, Japan benefits from lower oil costs, which ease imported inflation pressures that had been lifting producer and consumer prices and complicating the Bank of Japan’s (BoJ) policy outlook. This supports the case for a rate hike by reducing the risk that tighter policy pushes the economy into recession.

However, the EUR/JPY cross advanced as the Euro (EUR) found support after US President Donald Trump agreed to pause Iran bombing for two weeks. Trump said in a Truth Social post late Tuesday that he accepted a two-week ceasefire with Iran, conditional on reopening the Strait of Hormuz. A White House official added that Israel has also agreed to the ceasefire.

An Iranian official stated that talks with the United States will be held in Islamabad, Pakistan, to finalize details, aiming to translate battlefield gains into political outcomes within 15 days. Iran added that the meeting will start on Friday and could be extended if both sides agree.

However, Iran continues military actions in the Middle East and against Israel, with ongoing missile alerts. The Israeli military reported detecting missiles launched from Iran toward Israel, while Qatar’s Defence Ministry confirmed intercepting a missile attack targeting Qatar.

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.