Euro edges up against the British Pound but remains capped near weekly lows

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EUR/GBP nudges higher on Thursday, although it remains capped below 0.8650.
The cautious market mood amid conflicting news from the Middle East is keeping Euro rallies limited.
Later on the day, ECB's Lagarde and Eurozone Retail Sales might provide some guidance to the pair.

The Euro (EUR) is ticking up for the second consecutive day against the British Pound (GBP) on Thursday, although it remains capped below 0.8650 so far, with the one-week low of 0.8632 at a short distance. The cautious market mood amid the lack of progress in the US-Iran peace process keeps Euro bulls subdued, while recent Eurozone data has failed to boost the common currency so far.

Investors remain wary of risk amid the stalemate in the Iran war. Israel and Lebanon have agreed to implement a ceasefire, which would contribute to accelerating negotiations between the US and Iran, although markets remain sceptical about the real scope of the deal.

In the US, the House of Representatives has passed a resolution to block US President Donald Trump's war powers. The initiative is unlikely to come into effect as it will, highly likely, be vetoed by Trump, but it reflects a growing opposition to Iran’s war, even within the Republican Party.

Eurozone data fails to lift the Euro

On the macroeconomic front, May’s services activity figures in the UK and the Eurozone were revised higher on Wednesday, though they remained at contraction levels, especially in the Euro Area. 25-basis-point

Also on Wednesday, April’s Eurozone Producer Prices Index confirmed the inflationary trends. The impact on the Euro, however, was minimal, as the market has already discounted a 25-basis-point rate hike by the European Central Bank (ECB) at next week’s meeting.

Later on the day, ECB President Christine Lagarde will speak at an event in France ahead of the release of Eurozone Retail Sales, which are expected to have contracted for the third consecutive time in April. In the UK, there is no relevant data released on Thursday.

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.