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The pound-to-euro exchange rate pulls back from 1.16, but dips to be shallow.
Pound sterling resilience is catching up with some sectors of the analyst community and the financial commentariat who think the UK currency should be a lot lower than it is.
The consensus of investment bank analysts see rates closer to 1.14 by mid-year, but the pair looks like it would rather test 1.17 first.
The consensus-defying resilience comes on the day the UK votes in local elections, and numerous commentators warn Keir Starmer will unlikely withstand the fallout of Labour's loss and will be replaced by a left-wing socialist.
However, GBP resilience against both the EUR and USD indicates the market isn't as excited as the political pundits: the pound-euro conversion hovers near the top of its multi-month range at 1.1580, and GBP/USD is at the 1.36 threshold, putting it below 2-month highs.
"One of the more intriguing FX market developments since the start of the Iran war has been the GBP’s outperformance vs the USD and most of the European G10 currencies," says a new analysis from Crédit Agricole, which describes sterling's resilience as "intriguing".
The analysis concedes that the resilience is not entirely surprising.
"Positioning data suggests that the GBP remains the second most oversold G10 currency. The unwinding of legacy market shorts remains an important support for the GBP," says a daily note from Crédit Agricole's FX analysis team.
Furthermore, the bank's stock-market ETFs tracker points at persistent foreign portfolio inflows into the UK since the start of the year and suggests that global investors continue to unwind their underweight position in GBP assets.
With inflation set to rise, the Bank of England will likely hike interest rates, which is reflected in rising bond yields.
In fact, UK bond yields have risen more quickly than their peers since the war in Iran, tracking the price of oil and gas higher. That outperformance is proving supportive of the pound.
Consensus projections for the next four quarters, compiled from leading investment banks.
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"We think that the currency’s strength partly reflects its improving relative rate appeal, after investors stepped up their BoE rate hike expectations in the wake of the Iran war. Risk sentiment and demand for FX carry trades have also been holding up well in the wake of the US-Iran ceasefire announcement, in a boost to the appeal of the higher-yielding GBP," says Credit Agricole.
Turning to politics, some analysts and commentators have conflated the rise in UK bond yields with a rise in a UK-specific risk premium related to politics that should be a headwind to sterling.
With Labour set to be wiped out in today's local and devolved elections, the pressure on Keir Starmer will grow, and there's a fear he will be replaced by a left-winger who is far more loose with the country's finances.
"However, recent data releases have suggested that the UK economy has so far been able to weather the stagflation storm from the Iran war, and this has offset most of the negative GBP impact from political & fiscal policy uncertainty," says Crédit Agricole.
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