Synopsis:

MUFG predicts potential downside for the GBP in response to the upcoming Bank of England (BoE) policy meeting. They highlight the possibility of a dovish shift indicating closer proximity to rate cuts, prompting them to suggest a long position on EUR/GBP.

Key Insights:

• Dovish BoE Anticipated: MUFG anticipates that the BoE might signal readiness to cut rates sooner than market expectations currently reflect, potentially as early as June rather than the later months of August or September.

• GBP Historical Performance: There's a noted historical pattern of GBP underperformance in May, particularly evident from 2010 to 2020. Although this trend has been inconsistent post-COVID, it underlines potential seasonal weakness.

• Trade Recommendation: Reflecting their bearish stance on GBP, MUFG recommends initiating a long EUR/GBP position as a strategic move to capitalize on potential GBP depreciation.

• Balanced View on GBP Decline: While expecting GBP softness, MUFG believes that improved economic momentum in the UK and favorable conditions for higher-yielding currencies could temper a more significant drop.

Conclusion:

MUFG's analysis suggests cautious positioning regarding GBP leading into the BoE's meeting.