Pound Gains on US-Iran Deal Optimism as UK Faces Local Elections and Market Calm
Market Reactions and Political Developments Impacting the Pound
Pound Strengthens Amid US-Iran Deal Hopes
LONDON, May 6 (Reuters) - The pound rose against the dollar on Wednesday, as investors took heart from an Axios report saying that the United States and Iran were closing in on a deal to end the war.
UK Political Landscape and Local Elections
Labour Party Faces Challenges
In Britain, key local elections take place on Thursday and Prime Minister Keir Starmer's Labour Party is bracing for big losses. Repeated scandals and criticism that it has not yet delivered an improvement in living standards have stirred speculation Starmer may be replaced, a cause for concern for investors in the bond and currency markets.
Leadership Uncertainty and Market Sentiment
Prediction market site Polymarket shows there is a near-70% chance Starmer will be out by December. That has risen from a low probability of 49% in early April.
Sterling Performance and Economic Indicators
Currency Movements
Sterling was last up 0.6% on the day at $1.3621 around its highest since February. Against the euro, the pound was steady, leaving the single currency at 86.35 pence.
"More political instability could be on its way and investors could well be positioning for the potential for renewed political instability that could follow Thursday’s local elections," MUFG currency strategist .
Interest Rates and Economic Outlook
The pound has gained nearly 7% since Labour won the 2024 general election and benchmark interest rates are at 3.75%, down from 5.25%.
But the economy is flatlining, inflation is starting to flare as energy prices surge due to the U.S-Iran conflict, and borrowing costs for anything from a mortgage to personal loans have risen to multi-year highs, as gilt yields have risen.
Five-year gilts yield was around 4.53%, having jumped from 3.68% before the war broke out in late February and they are up from 4.05%, when Labour came to power.
A survey of monthly business activity showed UK services firms witnessed the largest rise in price pressures in three and a half years in April, with more than half of the respondents reporting an increase in their average cost burdens.
Market Volatility and Investor Sentiment
Options Market and Election Impact
Meanwhile, the options market painted a fairly sanguine picture for the election, as the cost of protection against big overnight swings in the pound fell in line with that for other major currencies.
Overnight implied volatility, one measure of the cost of hedging against big moves in the pound over a 24-hour period, drifted to around 6.83%, roughly in the middle of its recent range. Overnight implied vol for euro/sterling, meanwhile, was also relatively subdued at 2.71%, according to LSEG data.
A week ago, the cost of hedging against a big move after Thursday's election was around 6.27%.
(Reporting by Amanda Cooper; Editing by Bernadette Baum)
