Sterling appears positioned for a phase of cautious consolidation as markets weigh the tailwinds of de-escalating Middle East tensions against the looming uncertainty of domestic UK politics, inflation and growth.

The pound has made notable gains recently, approaching trend highs near 1.3650, buoyed by optimism surrounding a peaceful resolution in the Middle East.

This geopolitical development has reshaped the risk landscape, contributing to a decline in Brent crude prices below $100 per barrel, which in turn has diminished the recent safe-haven appeal of the U.S. dollar.

Retreating energy prices lower near-term UK inflation expectations allow markets to price in a less-hawkish Bank of England outlook. This eases 10-year gilt yields--which have fallen to 4.91% from over 5.12%--and, in turn, diminishes fiscal concerns related to UK borrowing costs. However, UK local elections present another potential headwind for sterling, particularly if they undermine Prime Minister Keir Starmer's hold on power and raise expectations of a more left-leaning and heavy-spending government.

Technically, cable finds support at today's low by 1.3590, followed by the rising 10-DMA at 1.3552 and the daily cloud top at 1.3514. However, upward momentum is capped near 1.3650, the May 1 and 6 high area.
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(Paul Spirgel is a Reuters market analyst. The views expressed are his own)