Market overview

Markets steadied yesterday as fears of a fresh Persian Gulf escalation eased and diplomacy remained alive. President Trump paused “Project Freedom” to assess whether a deal with Iran is possible, though Tehran pushed back, calling US demands to resume talks “impossible”.

Risk appetite improved nonetheless. Asian equities rallied, Brent fell back below $110 a barrel, and investors appeared to price a lower near-term risk of full-scale escalation rather than a genuine breakthrough.

USD: Yen strength weighs

The dollar opened softer, led by yen strength rather than geopolitics. The yen hit its strongest level in more than two months at 155.04, as markets speculated Japan may have intervened again after its 30 April action.

Further yen-led dollar dips are possible, but intervention constraints limit the scope for sustained moves. For now, this looks like a tactical dollar headwind, not a structural shift.

US data added little. March job openings were steady and hiring improved, suggesting a cooling but stable labour market. Friday’s April payrolls report is the key risk. A clear downside miss versus the 65k consensus could weaken the dollar and bring the 98 level into view.

GBP: Carry support meets political risk

Gilts sold off across the curve as UK markets caught up after the Bank Holiday, with local election risk adding pressure. The 30-year yield reached its highest level since 1998, while the ten-year touched 5.10%.

Sterling held firm, supported by higher yields and rising BoE expectations, with markets now pricing three quarter-point hikes this year. GBP/EUR remains capped near 1.16, while GBP/USD is testing 1.36.

The risk is that higher yields stop looking supportive and start signalling fiscal stress. A heavy Labour defeat in Thursday’s local elections could refocus markets on political instability, fiscal credibility and the cost of tighter policy. A less severe result would likely keep sterling’s carry appeal intact.

EUR: Supported, but stretched

The euro has recovered modestly, helped by dollar softness, resilient equities and yen intervention risk. EUR/USD has reclaimed 1.17 after holding support near its 200-day moving average around 1.1680.

The ECB has largely pre-signalled a June hike, but this is already priced, along with two further 25bp moves by year-end. That limits fresh support from rates.

Energy remains the main drag. Higher oil prices would pressure euro-area growth and revive stagflation concerns, making further ECB tightening less euro-positive. EUR/USD is supported for now, but upside conviction remains limited.

Looking ahead

• US payrolls on Friday are the main dollar event, with 65k jobs expected.
• A soft print could unwind Fed hike pricing and pressure the dollar.
• UK local elections may decide whether gilt stress becomes a sterling problem.
• Sterling remains carry-supported, but fiscal concerns are building.
• EUR/USD can hold firm while risk sentiment stays calm, but energy risks cap upside.