Market overview

Markets have had plenty to absorb over the past 24 hours. Hopes of Gulf de-escalation sparked a sharp risk rally yesterday morning, pushing the dollar lower and lifting emerging-market currencies, before some of the move faded later in the session.

UK politics is also in focus, with local and regional elections taking place today in what looks like the first major electoral test for Keir Starmer’s government. The polling backdrop is already unsettled: YouGov’s latest voting-intention survey puts Reform UK ahead on 25%, with Labour on 18%, the Conservatives on 17%, the Greens on 15% and the Liberal Democrats on 14%. PollCheck’s seven-poll average shows a similar picture, with Reform at 26% and both Labour and the Conservatives on 19%. For markets, the key takeaway is that UK politics looks increasingly fragmented, while sterling is not yet carrying much of a political risk premium.

FX is steadier this morning, but firmer equities still point to optimism that tensions may ease further. Reports suggest Iran is reviewing a US proposal to reopen the Strait of Hormuz, while nuclear talks could be pushed into a later phase. President Trump has kept pressure on Tehran by warning of further strikes if no agreement is reached, but his broader tone remains constructive.

Oil is trading just above $100 a barrel and volatility remains elevated. Even so, equities remain the more important signal for several G10 dollar crosses. For pairs such as EUR/USD, global risk appetite is doing more of the heavy lifting than crude alone.

USD: Deal momentum leaves the greenback exposed

The dollar remains highly sensitive to the credibility and timing of any US-Iran agreement. A clear deal in the coming days would probably keep the greenback under pressure, particularly if equities extend their rally.

If talks drag on without visible progress, the USD could claw back a meaningful share of its recent losses, even without renewed military escalation. Still, positioning looks more balanced, and resilient risk appetite leaves room for DXY to move back below its pre-conflict level of 97.50.

GBP: Political risk is underpriced

UK local elections could matter more for sterling than markets currently imply. Labour is expected to lose a large number of council seats, while speculation around Prime Minister Keir Starmer’s position continues to build.

Sterling and gilts have previously reacted poorly to any perceived threat to Starmer, and by extension Chancellor Rachel Reeves. Markets still associate the current leadership with a degree of fiscal restraint, so any sign of a shift away from that anchor could unsettle UK assets.

Opposition-party performance will also be important. Reform UK is widely expected to gain ground, but a strong showing from the Greens may attract particular market attention if it raises expectations of a more left-leaning Labour response.

For now, the pound and gilts show little evidence of a political risk premium. That leaves sterling vulnerable, especially against a euro that has responded more positively to de-escalation headlines.

EUR: Better risk tone keeps 1.1800 in sight

The euro traded firmly against other European G10 currencies yesterday as markets reduced the oil-related risk premium. ECB pricing for December fell by 15bp on the day, but still looks relatively aggressive at around 60bp.

Further de-escalation could push that pricing lower, although the 50bp area may offer near-term support. A June hike is no longer seen as a certainty, with markets pricing only 16bp. That likely reflects the view that a peace deal would give the ECB more time to judge the inflation impact of the energy shock.

EUR/USD came close to 1.1800 yesterday. A confirmed US-Iran deal would make a break above that level increasingly likely, although equities would remain the main driver even if short-term rate spreads moved back in the dollar’s favour.

Looking ahead

• US-Iran headlines remain the main near-term catalyst for FX.
• A credible deal would support risk assets and keep the dollar on the defensive.
• Stalled talks could allow the USD to recover, even without renewed escalation.
• Equity performance remains central for EUR/USD and broader dollar crosses.
• UK polling points to a fragmented political backdrop, with Reform ahead and Labour under pressure.
• Sterling looks exposed if local election results revive concerns around leadership, fiscal policy or Labour’s direction.
• EUR/GBP upside remains in focus, with a move towards 0.8700, or 1.1494 in GBP/EUR, still our baseline over the coming weeks.