🇬🇧 Political Uncertainty Weighs on Sterling Following UK Election Results

Last week proved significant for the pound, as the UK’s local elections reinforced concerns around Labour’s domestic political position. Reform UK emerged as one of the clear winners, while both Labour and the Conservatives recorded notable losses, highlighting growing voter dissatisfaction with the traditional parties.

Political instability remains a key risk for sterling, particularly if investors begin questioning the continuity of current fiscal policy. Longer term, markets may view the prospect of a right-leaning government as supportive for investment sentiment. However, near-term uncertainty remains elevated. Angela Rayner warned Labour is facing its ‘last chance’ following the election setbacks, while backing Andy Burnham for a potential return to Westminster.

A shift toward a more left-leaning Labour platform could weigh on GBP if it raises expectations of higher spending and borrowing. The key concern for investors is that any replacement of Starmer and Chancellor Rachel Reeves could signal a move away from fiscal discipline, increasing fears around UK debt levels. Cable opens the week below 1.36 despite last week’s gains, as Middle East tensions rise following President Trump’s rejection of Iran’s terms. Meanwhile, GBP/EUR remains relatively stable around 1.15.

🇺🇸 Renewed Middle East Uncertainty Clouds USD Outlook as Markets Await Washington’s Next Move

USD weakened last week after reports suggested the US and Iran were close to agreeing a preliminary deal designed to de-escalate the conflict and establish a framework for future nuclear negotiations. Supporting sentiment initially was President Donald Trump’s announcement of the end of ‘Project Freedom’, the military operation protecting shipping routes through the Strait of Hormuz. However, developments over the weekend shifted sentiment sharply.

President Trump described Iran’s response to US proposals as ‘totally unacceptable’, reviving fears of renewed escalation in the region. As a result, the Dollar could regain support through its traditional safe-haven appeal against G7 currencies. The fading optimism surrounding negotiations is likely to support the USD in the near term.

Domestically, US labour data was also positive. Nonfarm Payrolls rose by 115K in April, comfortably above expectations of 62K, while March’s figure was revised higher to 185K. Despite the stronger data, the Dollar received only modest support as markets remain focused on geopolitical developments.

🇪🇺 Trade Tensions and ECB Outlook Set to Drive Euro Direction

The Euro posted a strong week against the Dollar as geopolitical tensions temporarily eased, with EUR/USD reaching highs of 1.178. However, tensions have begun to rise again, although the pair still opens the week firmly within the 1.17 range.

The next two months are expected to be pivotal for EU-US relations after President Trump warned that the US could impose ‘much higher’ tariffs on European goods unless the EU removes tariffs on US products by July 4. The prospect of renewed trade tensions could become a key driver for the Euro in the near term.

Meanwhile, markets are increasingly pricing in tighter ECB policy, with expectations for at least two rate hikes this year and a more than 75% probability of the first move coming in June. ECB President Christine Lagarde also stated on Friday that the central bank stands ready to respond swiftly if necessary, adding that the Eurozone’s economic position entering the current energy shock is considerably stronger than it was before Russia’s invasion of Ukraine.

This Week’s Currency In Focus – New Zealand Dollar

This week’s Currency in Focus is the New Zealand Dollar, which has quietly emerged as one of the strongest performing currencies of 2026, gaining more than 5% against the US Dollar so far this year. Last week, the Kiwi advanced against all G10 peers as markets reacted positively to reports suggesting the Iran conflict could be nearing an end, improving overall risk sentiment. Falling oil prices, a softer US Dollar, and stronger equity markets created ideal conditions for NZD to rally.

However, domestic fundamentals have also played a key role in the currency’s strength. New Zealand’s Q1 wage data surprised to the upside, further boosting expectations that the Reserve Bank of New Zealand may need to keep rates higher for longer. Private sector wage growth rose by 0.5% quarter on quarter, exceeding both market expectations and the RBNZ’s 0.4% forecast. The currency’s resilience across both improving and volatile market conditions has established the New Zealand Dollar as one of the standout performers of 2026 so far.

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