MARKET REPORT
Geopolitical Tensions Flare as US Strikes Iran
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- US military strikes on Iranian targets after Iran fires on Navy destroyers pushing oil back above $101
- UK local election results paint a difficult picture for Labour. gilt yields hit highest since 1998 as GBP comes under pressure
Recap
USD continued to weaken during the European session as oil fell sharply. Brent dropped another 4.5% to $96.70, down from above $115 earlier in the week, with US crude falling to around $91 per barrel on mounting confidence that a Middle East deal is within reach.
GBP moves were muted as UK voters headed to the polls. Labour braced for up to 1,850 seat losses across around 5,000 council seats.
US jobless claims came in at 200,000, slightly below the 205,000 consensus, confirming the job market remains resilient ahead of today's non-farm payrolls.
German factory orders surged 5.0% MoM in March, well above consensus, though the economy ministry cautioned this likely reflects front-loading ahead of Middle East disruption rather than genuine underlying demand.
Overnight, the picture changed dramatically. US military strikes on Iranian targets followed Iran firing on three US Navy destroyers in the Strait of Hormuz – a significant escalation that sent Brent gaining more than 1% in Asian trading with oil back above $101. USD edged higher on the renewed haven demand.
UK local election results painted a difficult picture for Labour, with long-end gilt yields hitting their highest level since 1998 amid concerns over fiscal expansion and political fragmentation. GBP came under pressure as the results filtered through.
Today
Market rates
*Daily move - against G10 rates as of 5pm BST on 07.05.26
** Indicative rates - interbank rates as of 5pm BST on 07.05.26
Data points
Click here for a calendar of upcoming economic events Our thoughts
Today's session is dominated by two major risk events – overnight US-Iran military clashes and US non-farm payrolls – creating a highly volatile backdrop for FX markets heading into the weekend.
The geopolitical escalation is the immediate concern. US strikes on Iranian targets following Iran firing on US Navy destroyers have reignited tensions just as markets had been pricing in a peace deal. Oil is back above $101 – inflationary pressures are returning and USD haven demand is reasserting itself. This changes the tone significantly from yesterday's optimism.
US payrolls at 13:30 BST remains the standout data release. Consensus sits at 60k – a significant slowdown from March's 178k – but yesterday's low jobless claims suggest the job market is more resilient than that implies. A beat eases stagflation concerns and supports USD further. A miss would add to growth concerns in an already uncertain environment.
For GBP, local election results are adding to the pressure. A poor result raises the risk of a leadership challenge to Starmer, which would push UK borrowing costs higher and weigh on GBP. Long-end gilt yields are already at their highest since 1998.
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