MARKET REPORT
Peace Momentum Builds but Markets Tread Carefully into the Weekend
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- Israel-Lebanon ceasefire removes key obstacle in broader US-Iran negotiations, lifting risk sentiment into the close
- UK political risk ratchets higher as Starmer faces renewed calls to quit over Mandelson security vetting revelations
Recap
USD snapped its nine-day losing streak as UK political risk ratcheted higher, overshadowing a strong GDP beat. UK GDP grew 0.5% in February versus a 0.1% consensus – the strongest monthly reading since January 2024 – but GBPUSD slipped 0.20% and GBPEUR was broadly flat as BoE Governor Bailey said the bank is in no rush to raise rates, whilst markets looked through the backward-looking data.
UK political risk surged after PM Starmer faced renewed calls to resign following revelations that Peter Mandelson failed security vetting but was still allowed to take up his US ambassador post. GBP dropped as a result – reflecting both political uncertainty and fears that any Starmer replacement would adopt a less fiscally prudent approach.
Late in the evening, Trump confirmed a 10-day Israel-Lebanon ceasefire, removing a key sticking point in broader US-Iran negotiations. US jobless claims fell to 207,000, below consensus, and the Philadelphia Fed surged to 26.7, though US industrial production fell 0.5% unexpectedly. Eurozone CPI was revised up to 2.6% YoY with ECB officials warning the Iran war has "fundamentally changed" the inflation outlook.
Today
Market rates
*Daily move - against G10 rates as of 5pm BST on 16.04.26
** Indicative rates - interbank rates as of 5pm BST on 16.4.26
Our thoughts
This morning, Trump said the US and Iran could agree to a permanent ceasefire "pretty soon" and that talks may resume this weekend, adding that he plans to invite Israel and Lebanon to the White House as their 10-day truce kicks off today. The tone is constructive, but Asian stocks fell, oil slid, and US futures were mixed – suggesting markets are adopting a cautious wait-and-see approach rather than chasing the optimism further. Gulf Arab and European officials continue to caution that a comprehensive deal could take around six months, tempering expectations of a swift resolution.
For GBP, today's session faces a dual headwind – geopolitical uncertainty and rising domestic political risk. The Mandelson affair has added a fresh layer of political risk premium to sterling at an already sensitive time, with local elections looming on May 7th. Any further escalation in calls for Starmer's resignation could weigh on GBP and push longer-dated gilt yields higher still. The shorter end of the UK curve remains anchored by a cautious BoE, but the long end is increasingly reflecting fiscal concerns amplified by rising energy prices.
ECB officials keeping rate hike options open continues to provide a firm floor for EUR, widening the policy divergence with a more cautious BoE – a dynamic that adds another negative for GBPEUR.
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