Synopsis:

MUFG highlights potential downside risks for the British pound (GBP) stemming from anticipated faster rate cuts by the Bank of England (BoE) and upcoming budgetary concerns.

Key Points:

• Market Correction:

  • The recent decline in GBP has been influenced by both external factors, such as geopolitical tensions in the Middle East, and domestic economic fundamentals.
  • Escalating tensions, particularly regarding Israel and Iran, have led to a cautious sentiment, prompting market participants to reduce long GBP positions.

• Impact of Volatility:

  • Increased financial market volatility diminishes the appeal of long GBP carry positions, while another spike in energy prices could adversely affect the UK economy.

• Dovish BoE Signals:

  • BoE Governor Andrew Bailey's dovish remarks, suggesting a willingness to accelerate rate cuts if inflation trends favorably, contribute to the bearish outlook on GBP.
  • MUFG supports forecasts for the BoE to implement consecutive rate cuts in November and December.

• Upcoming Budget Considerations:

  • The anticipation surrounding the Labour government's first budget release on October 30 is gaining traction, as discussions about potential tax increases to address a projected £22 billion overspend unfold.
  • Public sentiment regarding these measures will play a crucial role in shaping market perceptions.

Conclusion:

Given the combination of geopolitical risks, dovish monetary policy signals from the BoE, and budgetary uncertainties, MUFG foresees increased downside risks for the GBP in the near term. The outlook emphasizes the importance of monitoring both economic developments and political responses as they influence currency positioning.