Risk appetite declined sharply on a spike in trade tensions after President Trump warned that tariffs on China would be increased to 25% at the end of this week.

The dollar failed to gain advantage of strong headline employment data on Friday as underlying measures were less favourable. Short covering also helped underpin EUR/USD.

Risk appetite declined sharply on a spike in trade tensions after President Trump warned that tariffs on China would be increased to 25% at the end of this week as US officials cited alleged Chinese backtracking.

Equities declined and the yen gained defensive support, although there was some easing of tensions with talks in Washington still going ahead.

There was volatile trading in oil prices with Iran tensions eventually dominating to push prices higher. Higher crude prices supported the Canadian dollar.

The Australian dollar rallied as the Reserve Bank held interest rates at 1.50%. Precious metals were able to secure only limited support despite weaker risk appetite.

The UK PMI services index increased slightly to 50.4 for April from 48.9 and in line with consensus forecasts. New business declined, but there was stronger upward pressure on prices while business sentiment strengthened to a 12-month high.

Both main parties suffered losses in local elections with heavy losses for the Conservative Party, increasing pressure for a Brexit deal to be reached. Sterling moved sharply higher during Friday’s New York session with an element of positioning ahead of the Holiday weekend. From just below 1.3000, GBP/USD rallied strongly to 4-week highs around 1.3170 while GBP/EUR dipped to near 1-month highs at 1.1776.

Sterling retreated on Monday, especially as weaker risk appetite undermined support. GBP/EUR rallied to near 1.1750 with GBP/USD dipping below 1.3100 before a recovery. Markets will monitor political developments with Prime Minister May still under intense pressure to set a resignation date.

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