Image © Adobe Stock
The British pound is underpinned ahead of the weekend by news the U.S. and Iran are set to agree an extended ceasefire, pending final approval from the U.S. President and senior Iranian leaders.
Risk-sensitive assets were supported by the news that a tentative deal to extend a ceasefire by 60 days and launch further talks on Tehran’s nuclear programme.
An agreement is reportedly set to include the reopening of the Strait of Hormuz, which would unlock millions of barrels of oil and liquified natural gas.
In response to developments, U.S. stocks rose to fresh records and oil prices eased to $91/barrel, which is the lower end of the range that oil has traded during the conflict.
Currency market action has reflected this latest risk-on phase, albeit in relatively muted fashion: the easing oil prices are supportive of the pound and euro in equal measure, which locks GBP/EUR into the mid-1.15s.
The dollar eases back on the news, GBP/USD firms above the 200-day moving average at 1.3420, which is understandable given the conflict has been broadly supportive of the Greenback, and de-escalation tends to weigh.
"Since the ceasefire in the Middle East, risk appetite has become the dominant driver of GBP-USD, benefiting when oil prices fall," explains the latest monthly currency research overview from HSBC.
During "periods in which markets increasingly price in an end to the conflict... the dollar has tended to weaken, regardless of movements in relative rate expectations," says Thu Lan Nguyen, Head of FX and Commodity Research at Commerzbank.
"We do not rule out the possibility that the US and Iran could announce a framework agreement in the coming days - according to media reports, this may hinge primarily on approval by the US President - in which case the dollar would likely weaken significantly," she adds.
The pound dropped against both the euro and dollar in Thursday trade as tensions in the Middle East were in an upswing with reports of isolated strikes.
The improved vibe on Friday swings the pendulum in favour of a better supported pound, although there's little evidence that sizeable moves in either direction are in the offing.
Looking ahead, geopolitical headlines will remain important.
Data-wise, there's nothing out of the UK due this day, although the Eurozone's inflation figures bear watching.
May flash inflation data from Germany, France, Italy and Spain, is due, meaning 75% of the aggregate euro area print will be accounted for.
The rise in inflation has so far been largely confined to a few energy components, like car fuel, and energy will remain the primary driver pushing euro area HICP inflation up to 3.2% y/y in May (April: 3.1% y/y).
Core inflation is also expected to edge up to 2.3% y/y (April: 2.2% y/y), though mainly driven by base effects rather than a pick-up in underlying momentum.
The ECB is expected to raise interest rates in the coming months as a result of rising pressures, which is on balance supportive of the euro.