By James Caley
It has been a subdued week for the currency markets, with traders largely waiting for fresh direction ahead of the UK local election results. Thursday in particular saw GBP/EUR trade in an unusually tight range, reflecting the cautious mood across the market ahead of potential political volatility going into Friday.
Sterling softened slightly overnight as the UK local election results started to come through, although the pound has recovered some ground this morning against both the euro and the US dollar. Reform UK has made notable gains in several areas, adding another political factor for markets to assess alongside Labour’s overall performance. Despite this, the election results have so far made relatively little difference to the broader trading levels we have seen across the week, although volatility could still increase as more results are announced throughout Friday.
The US dollar has seen periods of weakness this week as markets continue reacting to developments involving Iran and ongoing concerns around the Strait of Hormuz. Any threat to oil supply routes tends to make investors nervous, particularly as rising oil prices can quickly feed through into higher inflation. That then creates uncertainty around whether central banks will be able to reduce interest rates as quickly as markets had previously hoped. With the situation in the Middle East still evolving, traders remain highly sensitive to any new headlines, meaning further volatility remains very possible going into next week.
From a data perspective, there was little to significantly move the market this week. US services sector data came out broadly in line with expectations, while US job openings were slightly lower than previous figures, suggesting the US labour market may be cooling gradually rather than weakening sharply. In Australia, a surprise trade deficit overnight created volatility for the Australian dollar, while stronger than expected Canadian PMI data provided some support for the Canadian dollar.
Looking ahead to Friday, markets will continue to digest the UK local election results alongside any fresh developments from the Middle East. With political uncertainty and global tensions both still in focus, we could easily see volatility return before the weekend. As always, for anyone with an upcoming currency requirement, keeping in close contact with your account manager remains important given how quickly market sentiment can change in the current environment.