GBP/USD, Gold Forecast: Two trades to watch

GBP/USD rises on USD weakness, but could tomorrow’s UK local elections limit the upside?

GBP/USD is gaining ground amid a weaker U.S. dollar amid renewed hopes for a U.S.-Iran peace deal, despite some caution ahead of tomorrow's UK local elections.

 GBP/USD has risen from weekly lows of around 1.35 yesterday towards 1.36, on growing hopes that the war in the Middle East could be short-lived. U.S. President Trump boosted the market mood by pausing Project Freedom and saying that great progress is being made in peace negotiations with Tehran.

As a result, investors are selling out of the safe-haven U.S. dollar and moving into perceived riskier currencies such as sterling.

While the pound was moving higher today, it has struggled recently and could find that the upside is limited ahead of tomorrow's local elections.

UK local election risk

UK gilt yields have been rising sharply in recent days. On Tuesday, the 30-year gilt yield rose to its highest level since 1998, exceeding 5.8% at one point before settling at 5.74%, marking an 8 bp increase on the day. A similar rise was also seen in the 10-year gilt yield as bonds sold off across the curve.

This was most notable because it occurred in isolation, with no major selloffs in other US or European bond markets. Even more interestingly, UK yields decoupled from oil prices, rising even as the price of crude oil fell.

This suggests that something else is driving the sell-off in UK gilts, and it will most likely be a local risk premium tied to the elections on Thursday. Whilst these elections do not change anything in Westminster, they are equivalent to US midterms and provide an important gauge of sentiment towards the governing Labor Party.

Expectations are for Reform, the Greens, and the Liberal Democrats to perform well, while Labor and Conservatives could see large losses. Labor could lose two-thirds of its council seats.

The worry here is that elections could trigger a political crisis with calls for Prime Minister Kier Starmer to step down, together with Chancellor Rachel Reeves. The rise in gilt yields in recent sessions indicates the market is not impressed with the potential of more left-leaning replacements, Andy Burnham or Angela Rayner, raising fears that Labour could ditch Reeves' fiscal rules and lift spending at a time when fears over debt sustainability, high inflation, and an unsustainable fiscal position are already rife.

The outcomes of elections in Essex and Hackney are worth watching closely, as they could gauge where the Reform and the Greens are making significant inroads into UK council seats. These are typically Conservative and Labour strongholds, and if lost, they could point to further political upheaval in the UK.

On the other hand, if Labour outperforms, this could mean that bond and gilt yields are peaking and could move lower.

What does this mean for Sterling? Concerns over political upheaval and Reform, or the Greens winning more power, could lift Gilt yields, see Sterling come under pressure tomorrow as investors sell out of the UK.

However, a solid performance by Labour or the Conservatives could help to calm these nerves and offer support to Sterling as Gilt yields ease.

Should the US dollar continue to fall amid safe-haven outflows as the situation in the Middle East calms, this could see GBP/USD rise towards 1.37.

GBP/USD forecast – technical analysis

GBP/USD recovered from the 1.32 support zone, rising above the 50 and 200 SMAs to a high of 1.3650 before easing back to consolidate between 1.3450 and 1.36. The price trades towards the upper end of this range, and the RSI is above 50, keeping buyers hopeful of further gains.

Buyers will look to rise above 1.36 to extend gains towards 1.3650. Above here, 1.37, the round number comes into focus.

Sellers need to break below 1.3450 to create a lower low, exposing the 200 SMA at 1.34. Below here, sellers look towards 1.3335.

XAU/USD rises as Middle East tensions ease and oil prices fall

Gold prices are rising by more than 2% on Wednesday amid easing tensions in the Middle East. President Trump announced a temporary pause of the U.S. initiative to provide safe passage for vessels through the Strait of Hormuz and said that a deal with Iran was close.

This move marks a shift towards a more diplomatic approach, following heightened tensions earlier in the week, which threatened the fragile cease-fire.

Gold is traditionally a safe-haven asset, but has come under pressure since the start of the war in Iran, as a spike in energy prices stoked inflation fears, reinforcing expectations that interest rates could stay high for longer. This weighs on non-yielding gold.

Oil prices are falling following Trump's comments, with Brent below $110 a barrel and WTI back at $100 a barrel. This pullback in oil prices has helped rein in inflation expectations, bringing relief to gold.

Signs of more lasting truce could see energy price inflation risks lower, reducing the chance of further Fed tightening, which could help gold gain.

XUA/USD forecast - technical analysis

After running into a record high at 5598, gold has formed a series of lower highs. The recovery from the 200 SMA at 4100 ran into resistance at the 50 SMA and the falling trend line, which guided the price lower to 4500, reinforcing the bearish bias. However, from 4500, the price has recovered higher, moving above the resistance-turned-support at 4650.

Buyers will look to extend gains above the falling trend line at 4,690 to expose the 50 SMA at 4,800, also the round number. It will take a rise above 4,890 to create a higher high and bring 5,000, the psychological level, into focus.

 Failure to rise above the falling trend line resistance could see the price rebound lower. Support is seen at 4,500, with a break below here opening the door to 4,370, the 50% Fibonacci retracement of the 3,150 low and the 5,598 record high. A break below here exposes the 200 SMA at 4,300.