Sterling advanced modestly on Friday as investors weighed a fresh escalation of tensions in the Gulf alongside growing political turmoil at home. At 07:57 ET (12:57 GMT), GBP/USD was trading 0.35% higher at 1.3613, while EUR/USD was up 0.38% at 1.1767.
Market sentiment worsened overnight after military exchanges in the Strait of Hormuz. The United States carried out strikes and Iran responded by firing missiles at U.S. destroyers, accusing Washington of breaching a ceasefire agreement. Washington said it did not seek an escalation, but caution rose after a report that the United States was preparing to reinstate its military escort programme in Hormuz - known as "Project Freedom" - possibly as soon as this week. Meanwhile, Saudi Arabia and Kuwait removed airspace restrictions.
Previously, markets had treated the pause of the escort programme as a sign Washington was under pressure to pursue diplomacy, and the prospect of a restart has been interpreted as a reversal of that dynamic. The shifting posture in the Gulf fed a more cautious tone across asset markets.
ING described expectations for major currency pairs as having become "very binary", arguing equities could play a larger role than oil in determining the dollar's direction. The bank outlined two directional scenarios for euro/dollar - a breakdown in talks without further escalation that could push the pair under $1.17, or a conclusive deal that might lift it above $1.18.
Traders were also preparing for U.S. April payrolls data due later on Friday. ING projected payroll growth of 50,000, below the 65,000 consensus estimate, and expected the unemployment rate to remain at 4.3%. The bank said the underlying labour market was fragile despite headline numbers, with employment gains concentrated in healthcare, social care and hospitality.
Fed Governor Chris Waller recently described the labour market as weak, and some analysts suggested developments in the Gulf may have a greater influence on Federal Reserve expectations than the upcoming payrolls print.
At the same time, sterling faced domestic pressures after Britain's ruling Labour Party incurred heavy losses in local council elections. The poor results prompted some Labour lawmakers to call for Prime Minister Keir Starmer to step down, raising the risk of leadership instability within the governing party.
ING warned that markets had not priced in political risk to sterling or UK government bonds ahead of the elections, implying the pound and gilts could be vulnerable should uncertainty deepen. UK 10-year gilt yields are trading close to multi-year highs, reflecting some of that market sensitivity.
Market context
The combination of heightened geopolitical risk in the Gulf and mounting UK political uncertainty has produced a cautious backdrop for the pound. While sterling moved higher in early trade, the supporting factors appear to be more about positioning and risk recalibration than a decisive directional shift. Traders are watching both external geopolitical developments and domestic political developments, as well as U.S. labour data, for clearer signals on currency and rate expectations.