EUR/GBP rises above 0.8500 as Israel-Hamas tensions ease
- EUR/GBP appreciates due to improved risk sentiment, driven by potential for temporary ceasefire between Israel and Hamas.
- Israel has submitted revised proposal in hostage negotiations with Hamas, suggesting a possible ceasefire.
- The BoE is expected to keep interest rates steady at 4.25% on Thursday.
EUR/GBP gains ground after registering little losses in the previous session, trading around 0.8530 during the European hours on Monday. The currency cross receives support as the Euro (EUR) appreciates against its peers due to improved risk sentiment, driven by Israel's submission of revised proposal in hostage negotiations with Hamas, which could lead to a temporary ceasefire.
The Euro (EUR) also receives support as traders expect the European Central Bank (ECB) to pause its easing cycle to assess the impact of new US tariffs. The ECB vice-president Luis de Guindos said that the Eurozone’s economy had proven resilient but faced a number of risks, such as tariffs, that could curb growth.
UK Consumer Price Index (CPI) data will be eyed on Wednesday, with market expectations of prices growing at a moderate pace in May. Traders expect the Bank of England (BoE) to keep interest rates unchanged at 4.25% at its policy meeting on Thursday.
However, the risk-sensitive Euro may face challenges due to rising geopolitical tensions between Israel and Iran. Both countries continue attacking each other despite international calls for diplomacy and de-escalation. Iran fired multiple missiles targeting Israeli military-industrial centers and fuel facilities.
Iran informed mediators Qatar and Oman that it will not enter negotiations while under attack. A source denied reports that Tehran had approached Oman and Qatar with a request to engage the United States (US) to broker a ceasefire with Israel.
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.
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