Euro-Yen Holds Firm as Rising Oil Prices Weigh on Yen

Key Moments

EUR/JPY Holds Steady at Recent Levels

EUR/JPY is flat near 187.30 in early European trading on Wednesday. The pair saw slight losses yesterday, but has managed to maintain recent gains. The Japanese Yen (JPY) faces pressure, while oil prices are recovering from earlier declines.

Japan’s heavy reliance on oil imports from the Middle East makes the Yen vulnerable to shifts in crude prices. Additionally, some market speculation suggests the BoJ may intervene in currency markets, which could support the Yen.

Oil Rally Adds Pressure on the Yen

Crude oil prices are climbing as traders grow wary amid US–Iran uncertainty. The rise is partly driven by supply concerns after the US blocked the Strait of Hormuz on Tuesday, which may further strain negotiations with Iran.

In response, Bank of Japan Governor Kazuo Ueda warned that high oil prices could harm Japan’s economic growth, urging policymakers to stay vigilant amid the geopolitical risks.

Euro Faces Geopolitical Headwinds

The Euro (EUR) faces pressure amid uncertainty about the US–Iran ceasefire talks. Caution is building in the market, limiting EUR/JPY’s upside potential.

US President Donald Trump stated that he does not plan to extend the ceasefire. He added, “I think you’re going to be watching an amazing two days ahead.”

Meanwhile, US Vice President JD Vance highlighted “significant progress” in the first round of talks with Iran, and additional negotiations could take place soon.

ECB Expectations Provide Some Euro Support

Despite geopolitical risks, the Euro may find support. Markets are anticipating modest policy tightening from the European Central Bank (ECB) at the April 30 meeting. There are also expectations for more rate hikes later in the year.

ECB President Christine Lagarde mentioned that the central bank is well-prepared to handle developments in Iran, though it is too soon to predict the broader economic impacts.

Understanding Risk Sentiment Dynamics

In financial markets, investors talk about “risk-on” and “risk-off” environments. In “risk-on” conditions, investors are more willing to take risks and buy higher-yielding assets. In “risk-off” settings, they become more cautious and flock to safer assets with lower returns.

Common indicators of global risk appetite include:

• During “risk-on” phases, equity markets typically rise. Most commodities (except Gold) also gain, reflecting a more positive growth outlook. Commodity-linked currencies like AUD, CAD, and NZD usually strengthen. Cryptocurrencies may also perform well.
• In “risk-off” environments, investors tend to seek safety. Bonds, especially government bonds, tend to rise. Gold benefits from safe-haven demand, and currencies like the JPY, CHF, and USD gain strength.

Risk-On and Risk-Off Currencies

In “risk-on” periods, currencies from economies reliant on commodity exports often perform well. This includes the Australian Dollar (AUD), Canadian Dollar (CAD), New Zealand Dollar (NZD), and others like the Russian Ruble (RUB) and South African Rand (ZAR). Their strength is tied to expectations of higher demand for raw materials.

In “risk-off” times, investors typically turn to safe-haven currencies. The US Dollar (USD) benefits as the world’s reserve currency, supported by US government debt. The Japanese Yen (JPY) also strengthens due to domestic demand for bonds. The Swiss Franc (CHF) is favored for its capital protection features, tied to Switzerland’s strict banking laws.