The British pound advanced against the U.S. dollar this week as reports of progress in indirect US-Iran negotiations fueled hopes for de-escalation in the Middle East. Sterling rose 0.2% to $1.3621 on Thursday, extending a 0.4% gain from the previous session, after signals that Washington and Tehran were moving toward a limited temporary agreement aimed at halting the conflict.
The potential deal raised expectations that the Strait of Hormuz could reopen, easing fears of energy supply disruptions. This optimism supported global equities and weakened the dollar against several major currencies. The U.S. Dollar Index slipped 0.3% as safe-haven flows unwound, with the pound among the primary beneficiaries. Earlier in the week, GBP/USD had already climbed to 1.2725 from Friday’s close near 1.2650, reflecting a classic risk-on rotation away from the greenback.
Meanwhile, domestic political developments added another layer of complexity. UK local and regional elections are expected to deliver heavy losses for the ruling Labour Party, with potential council seat defeats in England and the risk of losing dominance in the Welsh Senedd and Scottish Holyrood. Market participants fear that leadership pressure on Prime Minister Keir Starmer could push fiscal policy leftward or trigger his replacement, unsettling bond markets. Analysts at Deutsche Bank noted that while option markets showed limited election-related volatility, risk reversals indicated a persistent bias to hedge against sterling weakness.
Currency traders continue to monitor geopolitical headlines and Bank of England policy, as sticky UK inflation has reduced expectations of near-term rate cuts, adding support to the pound against a Federal Reserve increasingly seen moving toward easing later this year.
