Euro Holds Near Highs As U.S. Sanctions Eyed

Key Moments

Euro Steadies After Strong Weekly Gains

The Euro (EUR) is giving back only a small portion of last week’s advance against the US Dollar (USD), with the EUR/USD pair trading above 1.1650 during Monday’s European session. The cross remains close to three-month highs, as investors show limited appetite for risk in the run-up to a new package of US sanctions targeting Iran that could further strain geopolitical conditions.

A modest retreat in Oil prices and ongoing market concerns surrounding US debt dynamics are lending support to the common currency, even as it consolidates recent gains.

Markets Brace for US Sanctions and Potential Middle East Fallout

The focus in global markets has shifted back toward the Middle East as the United States prepares fresh punitive measures against Iran. In a column published Sunday in the Financial Times, US Treasury Secretary Scott Bessent wrote that Washington is preparing the “single greatest offensive ever marshalled against an adversary,” with the stated aim to “sever every economic lifeline” to the Islamic Republic.

Traders are now waiting for clarity on the scope and mechanics of the new sanctions, amid speculation they could extend to traditional Iranian partners such as Iran and China. Market participants are effectively in a holding pattern as they assess the potential reach and impact of these measures.

Tehran has responded with sharp rhetoric, threatening to halt all Oil exports from Gulf producers and warning that any cooperation with Washington’s sanctions regime would be treated as an “act of war”. Despite the war of words, Oil is trading softer on Monday, with Brent Crude prices sitting 1.5% below Friday’s peak levels.

Dollar Debasement Concerns Support Euro

Beyond geopolitics, shifting views on US fiscal dynamics and bond market interventions are weighing on the Dollar. Strategists at OCBC noted that “USD debasement has re-emerged as a market theme” following the US Treasury’s unexpected decision to expand its long-end buyback program. According to them, the move signals “discomfort with the recent rise in long-dated yields.”

They added that 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,” reinforcing pressure on the greenback and indirectly supporting the Euro.

Key Events on a Light Data Calendar

With the macroeconomic schedule relatively sparse in the first half of the week, investors are orienting their attention toward a limited set of high-profile US events. The US Personal Consumption Expenditures (PCE) Prices Index, due on Wednesday, will be scrutinized for signals on inflation trends and potential implications for policy expectations.

Further out, Federal Reserve (Fed) Chairman Kevin Warsh’s remarks at the Jackson Hole Symposium on Friday will be closely watched. Market participants will be looking for insight into how the US Treasury’s bond buyback initiative might feed into the Fed’s broader monetary policy stance.

EUR/USD and Oil Snapshot

Understanding Risk Sentiment in Markets

In financial markets, the expressions “risk-on” and “risk-off” are used to describe how willing investors are to take on risk over a given period. In a “risk-on” phase, optimism about the outlook encourages investors to allocate more capital to higher-risk assets. In a “risk-off” environment, worries about the future push investors toward safer holdings, even if expected returns are lower.

Assets That Reflect Risk-On vs Risk-Off Behavior

During “risk-on” conditions, equity markets generally advance, and most commodities – excluding Gold – tend to appreciate as they benefit from expectations of stronger growth. Currencies from economies that are significant commodity exporters often strengthen, and cryptocurrencies typically find support from increased risk appetite.

Conversely, in “risk-off” settings, demand typically rises for government Bonds, especially those issued by major economies, while Gold tends to perform well. Safe-haven currencies such as the Japanese Yen, Swiss Franc, and US Dollar commonly gain as investors seek perceived security.

Currency Performance Across Sentiment Cycles

The Australian Dollar (AUD), Canadian Dollar (CAD), New Zealand Dollar (NZD), and several smaller currencies like the Ruble (RUB) and South African Rand (ZAR) usually benefit in “risk-on” environments. Their underlying economies rely heavily on commodity exports, and expectations of stronger economic activity support higher commodity prices.

In “risk-off” periods, the US Dollar (USD), Japanese Yen (JPY), and Swiss Franc (CHF) tend to appreciate. The US Dollar benefits from its role as the world’s primary reserve currency and from demand for US government debt. The Yen is supported by flows into Japanese government bonds, which are largely held domestically, while the Swiss Franc gains from perceptions of enhanced capital protection under Swiss banking laws.