EUR/GBP moves sideways after registering gains in the previous session, trading around 0.8700 during the Asian hours on Thursday. The currency cross remains subdued ahead of the Eurozone Retail Sales data release later in the day.
The annual Eurozone Retail Sales is expected to increase by 1.7% in January, following the 1.3% rise in December, while the monthly figure is expected to come at 0.3%, against the previous 0.5% decline.
European Central Bank (ECB) Governing Council member and Bank of France Governor François Villeroy de Galhau said the ECB is closely monitoring energy markets amid the Middle East war. Villeroy noted that the conflict’s duration will shape its impact on prices, but sees no reason at present for the ECB to raise interest rates.
ECB policymaker Martins Kazaks also said the central bank should “sit tight” and keep rates steady, given uncertainty surrounding the Iran conflict. However, surging oil and gas prices have revived inflation concerns, prompting some traders to price in the possibility of an ECB rate hike this year.
Meanwhile, the United Kingdom (UK) faces potential stagflation risks as higher energy costs could lift inflation while growth and employment remain subdued. As a major energy importer, the UK is particularly exposed to rising prices, which may keep inflation above the Bank of England’s (BoE) 2% target for an extended period. In January, UK headline inflation eased to 3% YoY.
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.