Euro holds near three-month highs as investors await US sanctions to Iran
- EUR/USD edges down from last week's highs but remains above 1.1650, close to three-month highs.
- The market's focus has shifted back to the Middle East, as the US prepares fresh sanctions against Iran.
- A mild pullback in Oil prices and market concerns about US debt are keeping the Euro supported.
The Euro (EUR) nurses minor losses against the US Dollar (USD) on Monday but holds most of the gains taken last week. The EUR/USD pair trades above 1.1650 during the European morning session with markets moderately reluctant to take risks ahead of the announcement of a new set of sanctions that might increase tensions between the US and Iran.
US Treasury Secretary Scott Bessent affirmed in a Financial Times column on Sunday that the US is preparing the “single greatest offensive ever marshalled against an adversary,”. ain¡mig to "sever every economic lifeline" to the Islamic Republic. The market is now awaiting the details of those measures, holding their breath as they might reach traditional Iranian allies like Iran and China.
Tehran, in turn, has threatened to stop all Oil exports from Gulf countries, and warned countries that collaborate with the US that the sanctions will be considered an “act of war”. Oil prices remain subdued on Monday, with the barrel of Brent Crude 1.5% below Friday’s highs.
Dollar debasement fears resurface
Strategists at OCBC highlight that “USD debasement has re-emerged as a market theme” after the US Treasury unexpectedly expanded its long-end buyback programme, a move they say signals “discomfort with the recent rise in long-dated yields.”
The “resulting unwind of US steepener positions has likely reinforced other debasement trades, including a weaker USD, a rebound in gold and higher US inflation breakevens,” say the OCBC experts in a note.
The macroeconomic docket is thin in the first half of the week, and traders will focus on the US Personal Consumption Expenditures (PCE) Prices Index data, due on Wednesday, and the Federal Reserve (Fed) Chairman Kevin Warsh's speech at the Jackson Hole Symposium, on Friday. Investors will be eager to know how the US Treasury's bond buyback plans will impact the central bank's monetary policy.
Risk sentiment FAQs
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.
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.
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.
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.