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May 29 - 12:55 PM

MUFG: Scope for Further GBP Gains on Renewed Carry Interest

By eFXdata  —  May 29 - 10:45 AM

Synopsis:

MUFG predicts a positive trajectory for the GBP, bolstered by renewed interest in carry trades amidst persistently low FX volatility and a stabilizing political environment in the UK. The lack of expected election-related volatility and recent economic data have adjusted rate cut expectations, potentially prolonging GBP's upward momentum.

Key Points:

  • Low FX Volatility and Carry Interest: With FX volatility remaining low, GBP becomes an attractive option for carry trades, benefiting from the yield differential without facing significant exchange rate volatility.
  • Political Stability: The upcoming UK general election is not anticipated to introduce significant uncertainty or disrupt market stability, which traditionally could deter carry interest.
  • Monetary Policy Expectations: Initial forecasts for a June rate cut by the Bank of England (BoE) have been shelved in light of stronger-than-expected April CPI data and the timing of the general election. The expectation now shifts to a likely rate cut in August.
  • Currency Strength Indicators: Recent movements in the BoE Trade Weighted Index and GBP/JPY levels, which have surged to their highest since before the Global Financial Crisis, signal robust carry demand for GBP.

Conclusion:

MUFG maintains a bullish outlook on GBP, driven by the potential for increased carry trade activity underpinned by low FX volatility and a lack of significant political or economic disruptions in the UK. This scenario presents a conducive environment for GBP to continue its ascent, especially against currencies with lower yields.

Source:
MUFG Research/Market Commentary

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