Key Moments
- EUR/JPY traded around 182.60 during Asian hours on Monday after two consecutive sessions of declines.
- Comments from US Energy Secretary Chris Wright on a possible end to the US-Israel conflict with Iran within “the next few weeks” supported risk sentiment and the Euro.
- Expectations of potential Japanese foreign exchange intervention and higher European energy costs are seen as constraints on further EUR/JPY gains.
EUR/JPY Climbs as Geopolitical Tensions Show Signs of Easing
EUR/JPY advanced during Asian trading on Monday, recovering after two straight days of losses and changing hands near 182.60. The move higher came as risk aversion moderated following a report in The Guardian that US Energy Secretary Chris Wright expects the US-Israel conflict with Iran to conclude within “the next few weeks.” Such an outcome is viewed as potentially supportive for oil supply and could help relieve upward pressure on energy prices.
Energy Costs Weigh on Euro Outlook
Despite the latest uptick, the upside in the EUR/JPY cross may remain constrained. The Euro continues to be pressured by elevated oil prices, which highlight Europe’s sensitivity to higher energy costs and the risk of a worsening trade balance. The recent jump in energy prices has already prompted money markets to price in two European Central Bank rate hikes this year, a pronounced change from the previous month, when no policy adjustments had been expected.
Political Focus on Strait of Hormuz and Regional Stability
French President Emmanuel Macron emphasized on Sunday that freedom of navigation through the Strait of Hormuz must be restored as quickly as possible. He also called on Iran’s president to immediately halt what he described as unacceptable attacks against other countries in the region, including Lebanon and Iraq.
Market participants are turning their attention to the European Central Bank’s upcoming policy gathering, where President Christine Lagarde is anticipated to outline how the institution plans to respond to conflict-driven inflation pressures.
JPY Support from Intervention Expectations
The EUR/JPY pair could also encounter resistance from the Japanese side, as the Yen finds support on speculation that authorities may step into the foreign exchange market to counter its weakness. Finance Minister Satsuki Katayama stated that the government is closely tracking currency developments and is prepared to take strong measures if deemed necessary.
| Factor | Impact on EUR/JPY |
|---|---|
| Expectations of Iran conflict resolution | Supports Euro via improved risk sentiment and potential easing in energy prices |
| Higher oil and energy prices | Negative for Euro due to Europe’s vulnerability and trade balance concerns |
| Prospect of ECB rate hikes | Provides some support to Euro but reflects inflationary pressures |
| Possible Japanese FX intervention | Supports Yen, potentially limiting further EUR/JPY gains |
Risk Sentiment: Key Concepts and Market Behavior
The article also outlines how broader risk sentiment shapes asset performance across global markets.
Understanding “Risk-on” vs “Risk-off”
The terms “risk-on” and “risk-off” describe how much risk investors are willing to take during a given period. In a “risk-on” environment, investors feel optimistic about the outlook and are more inclined to buy higher-risk assets. In a “risk-off” setting, concerns about the future grow, and investors shift toward safer assets that are perceived as more reliable, even if expected returns are relatively modest.
Assets That Reflect Risk Sentiment
During “risk-on” phases, stock markets generally climb, and most commodities – apart from Gold – tend to appreciate as they benefit from expectations of stronger growth. Currencies tied to economies that are major commodity exporters often strengthen, and Cryptocurrencies also tend to advance.
In “risk-off” periods, Bonds, particularly major government issues, typically rise. Gold tends to perform well, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar usually gain as investors seek capital preservation.
Currencies Favored in “Risk-on” Conditions
When markets are in a “risk-on” mood, the Australian Dollar (AUD), Canadian Dollar (CAD), New Zealand Dollar (NZD), and smaller foreign exchange names such as the Ruble (RUB) and South African Rand (ZAR) often strengthen. These economies rely heavily on commodity exports for growth, and commodity prices usually rise when investors anticipate stronger future demand for raw materials amid increased economic activity.
Currencies Favored in “Risk-off” Conditions
In “risk-off” environments, the US Dollar (USD), Japanese Yen (JPY) and Swiss Franc (CHF) have a tendency to appreciate. The US Dollar benefits from its role as the world’s reserve currency and from demand for US government debt, which is perceived as safe because “the largest economy in the world is unlikely to default.” The Yen gains from demand for Japanese government bonds, a high share of which is held domestically by investors who are seen as unlikely to sell, “even in a crisis.” The Swiss Franc is supported by “strict Swiss banking laws” that are viewed as providing “enhanced capital protection.”
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