Sterling edged higher against the dollar on Thursday as investors reacted to developments surrounding the Iran conflict, while also monitoring British local elections that could increase political pressure on Prime Minister Keir Starmer.
The pound was last up 0.2% against the dollar at $1.3621, adding to Wednesday’s 0.4% rise.
Traders responded to reports suggesting the United States and Iran were moving closer to a limited temporary agreement aimed at halting the conflict.
Iran developments weigh on dollar
Hopes surrounding a possible agreement between the United States and Iran raised expectations that the Strait of Hormuz could reopen.
That optimism supported global equities over the last 24 hours and weakened the dollar against several major currencies.
Against the euro, sterling remained largely unchanged at 86.4 pence.
Market sentiment remained tied closely to geopolitical developments, with investors continuing to monitor oil-related headlines and the broader implications of the Iran war for global trade and energy markets.
UK local elections remain in focus
Domestically, investor attention also shifted toward British local and regional elections.
The elections are expected to be difficult for the ruling Labour Party and could result in significant council seat losses in England.
The party could also lose its dominant position in the Welsh Senedd assembly and potentially finish third in Scotland’s Holyrood parliament.
The expected outcome has intensified concerns around Starmer’s leadership.
Market participants are increasingly watching whether pressure could build for the prime minister to resign or announce a timeline for his departure.
Bond investors, in particular, are worried that political pressure could push Starmer toward more left-leaning policies or lead to his replacement by a leader favouring higher public spending.
Bond market concerns linger
In recent years, selloffs in British government bonds, especially longer-dated debt, have also weighed on the pound.
Investors remain cautious that renewed political uncertainty could trigger similar moves in the gilt market.
However, options markets have so far shown limited concern about sharp swings in sterling linked to the elections.
“Risk-reversals show that it costs more to hedge against a fall in the pound than an equivalently sized rally. But, again, this is more often than not the status quo,” analysts at Deutsche Bank said, according to Reuters.
Analysts warn markets may reprice risks
Still, some analysts believe the elections could eventually have a larger impact on sterling.
For now, sterling remains supported by softer dollar sentiment tied to geopolitical developments.
However, investors continue to keep a close watch on Britain’s political landscape and its possible implications for fiscal policy and financial markets.
