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Risk appetite has a profound effect on the relative value of key currencies.
Last updated: 11 February 2026
Unprecedented uncertainty in the global financial system has been causing chaos this year. When reading the latest news, you may have encountered the terms ‘risk sentiment’ or ‘risk-on, risk-off’. But what do these terms mean for currencies?
Table of contents
- What is risk sentiment?
- How have the pound and euro been impacted by risk sentiment?
- Why are certain currencies deemed ‘safe-haven’ or ‘risk-sensitive’?
- How can you protect your business from currency movements?
- Frequently asked questions
What is risk sentiment?
‘Risk-on, risk-off’ or ‘risk sentiment’ refers to investor’s appetite for ‘risk’. It is sometimes also referred to as ‘risk sentiment’ or investor sentiment.
A low-risk environment is described as ‘risk-on’. A ‘risk-on’ situation is likely to occur during times of market stability or recovery. This allows investors to opt for ‘riskier’ assets, such as currencies like the Australian or Canadian dollar.
If the risk is perceived to be high, this is described as ‘risk-off’. A ‘risk-off’ environment is likely to occur during times of instability. This could be caused by events such as the global trade war, which prompt investors to err on the side of caution and opt for safer assets. These assets could be ‘safe-haven’ currencies such as the US dollar or Japanese yen.
How have the pound and euro been impacted by risk sentiment?
Typically, sterling would weaken in a ‘risk off’ environment and strengthen during ‘risk on’. However, in a ‘risk-off’ environment it can weaken against ‘safe-haven’ currencies. It can also strengthen against ‘riskier’ assets, such as emerging market currencies.
In recent years, the euro has started to behave more like a ‘safe-haven’ currency, strengthening in times of market volatility. On the other hand, the US dollar’s status as a safe-haven has started to slip, thanks in part to a government less concerned with diplomatic and economic orthodoxy.
This is not always the case, though. When the crisis in Ukraine escalated in early 2022, the euro weakened against the pound. This is because the crisis and sanctions on Russia had a direct effect on the European economy. Europe is reliant on Russian gas and energy.
Why are certain currencies deemed ‘safe-haven’ or ‘risk-sensitive’?
A ‘safe-haven’ currency is usually considered as such if it has a stable economy behind it. For example, the Swiss Franc is a safe-haven currency due to factors such as the stable Swiss government, safe banking industry and low unemployment. The Singapore dollar’s safe-haven status has grown in recent years, benefitting from being the only southeast Asian economy considered to be developed rather than emerging.
In contrast to this, the Australian dollar is a risk-sensitive currency, as it is strongly tied to commodities. This is because Australia’s economy is heavily reliant on the export of agricultural and mining products. These commodities are volatile and demand from Asia tends to impact the Aussie dollar.
Similarly, emerging market currencies, such as the Russian ruble and Brazilian real tend to be ‘riskier’ due to the Russian and Brazilian economies’ heavy reliance on commodities and bouts of political instability.
How can you protect your business from currency movements?
It’s impossible to predict how the pound will fare in the coming days and weeks. In these uncertain times, it’s wise to protect your business from volatility. Call us now on 020 7898 0500 or email us on [email protected].
Frequently asked questions
Why are currency markets sensitive to risk?
Currency markets are filled with speculative investors looking to profit from the ebbs and flows of exchange rates. When new developments suggest a currency will be affected, that tends to prompt them to shift their money elsewhere, which affects the value of the currency.
What type of events influence risk appetite?
Economic data, political announcements as well as geopolitical trends like wars and trade deals can all affect risk appetite. When market deem something to be positive, risk appetite tends to increase. But when something perceived as negative occurs, they will shift to a risk-off stance.
