Synopsis:

BofA notes that while the recent Gilt sell-off and GBP weakness may have been an overreaction, lingering fiscal concerns, sticky inflation, and negative sentiment make it premature to buy GBP.

Key Points:

1. Gilt Market Turmoil:

   • Gilt markets experienced their heaviest selling since September 2022, driven by a global rates sell-off, UK fiscal concerns, and sticky inflation.
   • Negative investor sentiment and positioning exacerbated the move.

2. Cautious on GBP Recovery:

   • While the market may have overreacted, last year's GBP positives—surprising growth and optimism on the BoE—are no longer present.
   • The market has already priced in a shallow BoE easing cycle, and the UK government's "honeymoon period" has ended.

3. Investor Sentiment:

   • Discussions with investors reveal persistent negativity toward the UK economy and GBP.

Conclusion:

While the Gilt sell-off and GBP weakness might seem overdone, BofA argues it is too early to take a contrarian position. Lingering fiscal and inflation concerns, coupled with negative sentiment, suggest caution before re-entering GBP longs.