Sterling Stable as Markets Eye UK Local Elections and Political Tensions
By Sophie Kiderlin
Market Overview and Key Political Drivers
LONDON, May 5 (Reuters) - The British pound was broadly steady on Tuesday as traders focused on UK local elections on Thursday that could add to the pressure on Prime Minister Keir Starmer, and the standoff between the U.S. and Iran in the Strait of Hormuz.
Sterling was little changed at $1.3539, and a touch stronger against the euro at 86.31 pence.
Geopolitical Tensions in the Middle East
The fragile truce in the Middle East was under strain after the U.S. and Iran exchanged fire in the Gulf and wrestled for control of the Strait of Hormuz.
Impact of UK Local Elections on Sterling
Sterling has performed better than many rivals during the war so far, but UK local elections could be a headwind.
Bank of England Policy and Market Expectations
"The biggest story for sterling since the start of this war has been the change in money market pricing of Bank of England interest rate hikes," Jane Foley, head of FX strategy at Rabobank, said.
"Before the war, the market was expecting cuts and then they swung very quickly into expecting hikes and as a consequence of that, sterling has been one of the better G10 performers since the start of this war."
Money markets were last pricing in at least two 25-basis-point rate hikes from the BoE this year, with a good chance of a third. The central bank last week kept policy on hold, but left the door open to rate increases.
Risks to Sterling from Economic Weakness and Political Uncertainty
However, Foley noted, the UK economy is facing some weakness, which could be amplified by interest rate hikes. That in turn could eventually weigh on sterling, she said, with the May 7 local elections also presenting a risk factor.
Polls suggest Starmer's Labour Party will incur heavy losses in the vote, which could trigger a leadership challenge.
"If the likelihood of Starmer's resignation increases, this will weigh on the pound," Michael Pfister, FX analyst at Commerzbank, said in a note.
Markets are concerned that a potentially more left-wing successor could put public finances at risk.
(Reporting by Sophie Kiderlin. Editing by Mark Potter)
