FX Daily: Testing the ‘this is it’ trade in Daily Currencies Ratings 07/05/2026 USD: More volatility ahead It’s been a hectic 24 hours for markets. The risk‑on trade driven by Gulf de‑escalation triggered a sizeable dollar sell‑off and rallies in EM currencies yesterday morning, before a partial pullback in the afternoon. Volatility in FX should remain elevated into early next week as markets await the final word on a US‑Iran deal. Should negotiations drag on without tangible progress, we would expect the USD to reclaim recent losses, even in the absence of any military re‑escalation. This morning, FX is showing signs of stabilisation, but higher equities continue to point to optimism around further de‑escalation. This is reinforced by growing speculation that President Trump wants to wrap up a deal with Iran ahead of the 14-15 summit with Chinese President Xi Jinping. The latest reports suggest Iran is reviewing the US proposal to reopen the Strait of Hormuz, with nuclear talks pushed to a later stage. Trump has again warned of new attacks if a deal is not agreed, but has sounded broadly optimistic and said the war could end within a week. Oil prices are hovering just above $100/bbl and remain highly volatile. We have been stressing the increasing relevance of equity markets for dollar crosses, and this remains crucial. For some G10 pairs, including EUR/USD, global equities currently exhibit a higher beta than oil prices. Any major further leg lower in the USD still requires a strong equity session, regardless of oil moves. The strength in risk assets and more balanced positioning suggest that DXY can easily fall back below the 97.50 pre‑war levels, even if oil prices settle significantly above February levels. Francesco Pesole EUR: Eyeing return above 1.180 if deal agreed The euro performed well against other G10 European currencies yesterday, as markets more convincingly priced out the oil‑related risk premium. ECB pricing for December dropped by 15bp on the day, but remains relatively aggressive at 60bp. Another round of de‑escalation could push pricing lower, although there may still be decent support around 50bp for now. Notably, a June hike is no longer a done deal for markets, with pricing down to 16bp. This may reflect some growing speculation that a peace deal would give the ECB more time to assess the inflation implications of the energy shock. Yesterday’s EUR/USD intraday peak came very close to 1.1800, which to us suggests that, should a US‑Iran deal be finalised in the coming days, a break above 1.1800 would be on the cards. Equity markets would still do most of the heavy lifting in driving EUR/USD, even if short‑term rate differentials were to re‑widen in favour of the USD. Francesco Pesole GBP: Downside risks from local elections The UK holds local elections today (our full preview here), and here’s what to watch from a market perspective. First is the performance of the ruling Labour Party, which is expected to lose a large share of its council seats. Prime Minister Keir Starmer is facing a popularity crisis, alongside growing speculation around a potential leadership challenge. The pound and gilts have reacted negatively in the past to any risk of Starmer’s exit (and, by extension, that of Chancellor Rachel Reeves), given markets’ association of the current leadership with a degree of fiscal rigour. Second is the showing of opposition parties. Right‑wing Reform UK is widely expected to perform well in these elections,