Sterling moved modestly higher versus the dollar on Thursday as traders absorbed a broad risk rally that began on Wednesday amid reports of eased tensions in the Gulf. The advance, however, lacked fresh momentum and markets have settled into a cautious consolidation phase.
At 07:40 ET (12:40 GMT), GBP/USD was 0.16% firmer at 1.3617, while EUR/USD was up 0.15% at 1.1766. Both pairs traded in tight ranges after the initial uplift from yesterday’s developments.
The recent dollar weakness followed signals that Iran may be open to reopening the Strait of Hormuz and media reports that the United States and Tehran are close to a limited, temporary understanding to halt hostilities. Reuters, citing U.S. and regional sources, said the two sides are nearing terms, and U.S. President Donald Trump expressed broad optimism, saying the war could end within a week.
Market participants have further interpreted Mr. Trump’s timeline as possibly connected to his desire to conclude a deal prior to the May 14-15 summit with Chinese President Xi Jinping, lending extra momentum to risk assets. But important caveats remain.
Mr. Trump also warned of potential new strikes at "much higher intensity" if Iran declines any proposed terms, a comment that underscores the fragility of the current détente. Commodity markets reflect that fragility: oil prices remain close to $100 per barrel, leaving a sustained risk premium in energy markets.
Analysts at ING argued that any further decline in the U.S. dollar would still require robust equity market gains regardless of movements in oil. ING noted the DXY index could fall back below 97.50 - a level seen before the outbreak of hostilities - if risk assets maintain their advance. Conversely, ING warned that without a signed agreement a market pullback could allow the dollar to quickly recover recent losses.
Domestic political developments in the United Kingdom add another layer of uncertainty. Local elections are taking place, and polling has pointed to Labour losing a significant share of council seats. Markets are watching closely for any signs of a leadership challenge to Prime Minister Starmer, since current valuations for the pound and UK gilts do not appear to include a visible political risk premium.
ING highlighted the potential for a sizeable downside shock to sterling and gilts should left-wing parties outperform and rekindle concerns about fiscal sustainability. That risk is set against already-elevated borrowing costs: UK 10-year Gilt yields are trading at multi-year highs.
EUR/GBP held near 0.8640. ING maintains a baseline view that the cross could climb above 0.8700 in the coming weeks, pointing to the euro’s relatively stronger reaction to de-escalation headlines.
On EUR/USD, the intraday high recorded yesterday approached 1.1800. ING suggested that a finalised temporary deal could be strong enough to push the euro through that level, driven more by gains in equities than by changes in interest rate differentials.
Market pricing for European Central Bank (ECB) action has shifted in line with the easing geopolitical shock. Futures imply a diminished chance of a June ECB rate hike, with June hike pricing down to about 16 basis points, while pricing for December remains around 60 basis points. ING expects EUR/GBP support at 0.8600 to remain intact through the release of local election results.
With oil prices near $100/bbl, heightened gilt yields, and a dollar sensitive to equity moves and geopolitical progress, investors are navigating a market environment where a fragile ceasefire and domestic political developments both carry the potential to alter risk pricing across FX, bonds and commodity markets.
Market snapshot (07:40 ET / 12:40 GMT)
- GBP/USD: 1.3617 (+0.16%)
- EUR/USD: 1.1766 (+0.15%)
- EUR/GBP: 0.8640
- Oil: near $100 per barrel
- UK 10-year Gilt yields: trading at multi-year highs