Euro edges down from weekly highs as markets ponder chances of a US-Iran deal

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The Euro (EUR) is trading moderately lower against the US Dollar (USD) on Friday, changing hands at 1.1565 at the time of writing, down from the weekly highs, at 1.1590 hit on Thursday.

EUR/USD pulls back from 1.1590 highs but remains on track for a nearly 0.4% weekly gain.
Hopes of a peace deal in the US and a hawkishly leaning ECB have provided some support to the Euro.
In the US, cooler-than-expected core PPI figures have pushed back Fed monetary tightening hopes.

The Euro (EUR) is trading moderately lower against the US Dollar (USD) on Friday, changing hands at 1.1565 at the time of writing, down from the weekly highs, at 1.1590 hit on Thursday. The pair, however, remains on track for a nearly 0.4% weekly appreciation, following a rate hike by the European Central Bank (ECB) on Thursday and a brighter market mood amid news of a potential peace deal in Iran.

Markets have welcomed comments by US President Donald Trump announcing the cancellation of a third day of strikes on Iran, as he claimed a great breakthrough in the negotiations. Iran’s reaction, however, has been cautious. Tehran’s Foreign Minister spokesperson, Ismain Baghaei, affirmed on local media that a document is being analysed, but he also said that it is “closer to being approved than ever before”.

On Thursday, the ECB hiked its benchmark interest rate by 0.25% for the first time in nearly three years, leaving the Rate on Deposit Facility at 2.25%. The bank refused to commit to any particular rate path, as usual, but the upward revision of the inflation forecasts has been taken as a signal that further tightening is on the table. The Euro appreciated after the event

Data released on Friday revealed that the German final Harmonised Index of Consumer Prices (HICP) confirmed preliminary figures of a 2.7% year-on-year (YoY) growth and a 0.1% contraction in May. In France, the final CPI data were also unchanged from previous estimations of a 0.1% growth in May and a 2.8% increase in the year.

In the US, Producer Price Index (PPI) figures showed a faster-than-expected growth in May. The Core PPI, however, grew at a steady 4.9% (YoY) rate, against market expectations of a further acceleration to 5.4%, suggesting that the spillover from the energy shock might have been contained. These figures pushed back hopes of Federal Reserve (Fed) tightening and undermined speculative demand for the USD.

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.