Pound nudges higher on Iran peace hopes, UK elections in focus

LONDON, May 7 (Reuters) - Sterling nudged higher on the dollar ​on Thursday, ⁠largely reacting to news around oil and ​the Iran war though investors were also keeping a wary eye on British local elections which are expected to deal ​a ‌blow to Prime Minister Keir Starmer.

The pound was last up 0.2% on the dollar at $1.3621, building on Wednesday's 0.4% ⁠gain, as traders reacted to reports, including from Reuters, that ⁠the U.S. and Iran are edging toward ​a limited, temporary agreement to halt their war.

Hopes that could lead to the reopening of the Strait of Hormuz have supported stocks in the past 24 hours and weighed on the dollar against most ​peers.

Versus ‌the euro, sterling was steady at 86.4 pence to the common currency.

In terms of domestic news, the focus is on British local and regional elections which could see the nationally governing Labour party lose swathes of council seats in England, the end of its dominance of the Welsh Senedd ​assembly and a possible third-place finish for Scotland's Holyrood parliament.

In turn that could see Starmer come under ‌pressure again to quit or at least set out a timetable for his departure.

Bond investors are worried Starmer will shift policy to the left ‌or be replaced by a more left-wing leader who could push for more spending.

And, in recent years, selloffs in British government bonds, particularly longer dated debt, have also sent the pound lower.

But, ​so far at least, options markets are not pricing sharp swings in the British currency due to the election.

"Risk-reversals show ‌that it costs more to hedge against a fall in the pound than an equivalently sized rally. But, again, this is more often than not the status quo," said analysts at Deutsche Bank.

"Indeed, the ⁠skew is ⁠far less extreme heading into the local elections than around other ‌recent moments of political uncertainty, and is not far from its average over the past year."

But Nick Rees, head of macro research ​at Monex Europe, said the ​elections could still matter for the pound.

"No one wanted to ‌be the leader who would wear (the local election loss). That risk is out of the way tomorrow, so regardless of what happens, Starmer’s more vulnerable."

"Markets haven’t priced that in but they will at some point," he said. (Reporting by Alun John; Editing by Alison Williams)