By Justin McQueen

Apr 8 (Reuters) - A full-scale escalation was avoided after the U.S. and Iran agreed a two-week ceasefire, pulling the rug from under the geo risk premium that had been supporting the USD. Yields down, oil down, hedges unwound, resulting in a rally for risk assets. Cable has retraced back into the 1.3485-1.3500 zone, effectively testing the pre-conflict levels, and the question now is whether there is real conviction to chase it through here or whether the market is content to fade the move.

It's worth noting that strikes are reportedly still ongoing in the region so while tail risks have narrowed, this is far from resolved. Conditions are expected to remain choppy with dollar softness at the margin. As flagged previously, GBP is arguably not the cleanest expression of USD weakness heading into May local elections. Political noise will keep a lid on extended topside. That said, seasonals are still constructive for sterling and with geo risk dialed down, the path of least resistance is modestly firmer. A weaker dollar lifts all boats.

Technically, 1.3485-1.3500 is the line in the sand. A clean break and close above opens the door for an impulsive leg toward 1.3600. Fail here and we likely consolidate in the short-run.
GBPUSD hourly chart


(Justin McQueen is a Reuters market analyst. (The views expressed are his own) ((Email: ))