Forex Today: Mood remains upbeat despite uncertainty over US-Iran talks
Here is what you need to know on Wednesday, March 25:
The market mood remains upbeat in the early European session on Wednesday as investors assess the prospects of a de-escalation of the conflict in the Middle East. The economic calendar will feature IFO sentiment data from Germany, and February Export Price Index and Import Price Index data from the US later in the day.
The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the weakest against the British Pound.
USD EUR GBP JPY CAD AUD NZD CHF USD -0.51% -0.54% -0.17% 0.45% 0.44% 0.07% 0.22% EUR 0.51% -0.02% 0.35% 0.98% 0.95% 0.59% 0.75% GBP 0.54% 0.02% 0.34% 1.00% 0.99% 0.59% 0.70% JPY 0.17% -0.35% -0.34% 0.60% 0.60% 0.21% 0.30% CAD -0.45% -0.98% -1.00% -0.60% 0.00% -0.38% -0.24% AUD -0.44% -0.95% -0.99% -0.60% -0.01% -0.37% -0.29% NZD -0.07% -0.59% -0.59% -0.21% 0.38% 0.37% 0.08% CHF -0.22% -0.75% -0.70% -0.30% 0.24% 0.29% -0.08%The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).
During the American trading hours on Tuesday, Israeli Channel 12 claimed that a 12-month ceasefire could be announced in accordance with the mechanism developed by Steve Wİkoff and Jared Kushner. Other details surrounding the matter suggested that the proposal is complex and has 15 points that need to be agreed upon for the Strait of Hormuz to be reopened. The framework of the proposal is said to be negotiated during the ceasefire period. The US Dollar (USD) Index retreated from daily highs following this development and ended the day virtually unchanged on Tuesday.
In the meantime, Iran's Revolutionary Guards said early Wednesday that they had fired missiles at Israel as well as military bases hosting US forces in Kuwait, Jordan and Bahrain. According to the Al Jazeera, a spokesperson for Iran’s foreign ministry has dismissed claims of negotiations and promised to continue fighting.
In the European session on Wednesday, the US Dollar (USD) Index clings to moderate gains near 99.40, while US stock index futures gain between 0.6% and 0.7% on the day. Meanwhile, Crude Oil prices trade near the lower limit of the weekly range, with the barrel of West Texas Intermediate (WTI) staying well below $90.
The UK's Office for National Statistics reported early Wednesday that annual inflation, as measured by the change in the Consumer Price Index, held steady at 3% in February, as anticipated. In this period, the core CPI rose 3.2%, compared to the market expectation of 3.1%. Other details of the report showed that the Retail Price Index was up 0.4% on a monthly basis. GBP/USD stays under modest bearish pressure and trades in negative territory below 1.3400 on Wednesday.
The data from Australia showed that the annual CPI inflation edged lower to 3.7% in February from 3.8% in January. AUD/USD remains on the back foot and was last seen losing about 0.5% on the day near 0.6960.
After staging a late rebound to end the day with small losses on Tuesday, EUR/USD struggles to gather recovery momentum and trades below 1.1600 in the European session on Wednesday.
Gold extends its rebound after closing in positive territory on Tuesday and trades above $4,500 on Wednesday, gaining more than 1.5%.
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.
What are the key assets to track to understand risk sentiment dynamics?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.
Which currencies strengthen when sentiment is "risk-on"?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.
Which currencies strengthen when sentiment is "risk-off"?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.
