Sterling Strongest Since Mid-February as PM Starmer Holds On

The pound climbed above $1.36, reaching its strongest level since mid-February, as Prime Minister Keir Starmer vowed to stay in office despite early election results showing significant losses for his Labour Party. Nigel Farage’s Reform UK gained ground in English council elections, while Labour lost hundreds of seats, though the decline was less severe than some of the worst-case forecasts. Many results are still expected to be announced after markets close today and into the weekend. Meanwhile, optimism over a potential US-Iran peace deal eased concerns that persistent inflation could keep interest rates elevated for longer, after President Trump maintained that the ceasefire remained "in effect" despite recent clashes. Financial markets continue to anticipate two Bank of England rate hikes by year-end.

The pound climbed toward $1.36, close to an over two-month high, as investors assessed the fallout from UK local and devolved government elections and the growing instability in the Middle East. Early election results showed Nigel Farage’s Reform UK gaining traction in English councils, while Prime Minister Keir Starmer’s Labour Party lost nearly half the seats it was defending, though the decline was less steep than some had feared. The Conservative Party also faced significant losses, surrendering over a quarter of its seats, while the Greens nearly doubled their count and the Liberal Democrats made progress. At the same time, geopolitical tensions intensified after Washington and Tehran exchanged fire in southern Iran, pushing Brent crude prices back to $100 a barrel, despite President Trump’s assertion that the ceasefire was still "in effect." Markets are pricing in roughly 60 bps of Bank of England rate hikes, equivalent to at least two increases, before year-end.

The British pound rose above $1.36, hitting its highest level since mid-February, as the US dollar’s safe-haven demand eased amid optimism over a potential US-Iran agreement to end hostilities. Washington sent Iran a one-page memorandum outlining steps to gradually reopen the Strait of Hormuz and lift the US blockade on Iranian ports, with investors now awaiting Tehran’s response. Meanwhile, voters across England, Scotland, and Wales cast ballots today in elections that will determine control of the Scottish and Welsh parliaments and over half of England’s councils. The vote is a key test for Prime Minister Keir Starmer, with polls suggesting Labour may face setbacks after policy missteps and tax hikes. On monetary policy, markets now expect about 50 basis points of tightening, equivalent to two rate hikes, by the end of the year, down from earlier projections of up to three.