MUFG Research adopts a cautious bias on GBP ahead of the UK May 7th local elections.

"PM Starmer has been politically wounded ahead of the local elections taking place on 7th May. The parliamentary vote on whether Starmer should face an ethics inquiry was won by the government, but 15 Labour MPs voted with the opposition and 53 Labour MPs did not vote. His backbench support is weakening, and Labour is expected to perform poorly in the local elections. The risk of a leadership challenge is certainly growing and a move to remove Starmer over the summer ahead of the annual political party conference season is high. If this was to happen at a time of a further rise in crude oil prices, a renewed sell-off in the Gilt market could certainly begin to play a role in undermining pound performance," MUFG notes.

"Yields has played a role in providing the pound with support, but political instability and fiscal risks could well begin to de-stabilise the Gilt market once again and result in the pound losing its support from higher yields. We see scope for the pound to underperform the euro as the US dollar weakens more broadly," MUFG adds.