06:38 AM EST, 11/26/2024 (MT Newswires) -- The Bank of England's caution relative to the European Central Bank is one possible factor encouraging Leveraged Funds to maintain their long sterling (GBP) positions, said MUFG.

BoE Deputy Governor Clare Lombardelli spoke Monday at the BoE Watchers' Conference in London and stated that the BoE was concerned that wage growth wasn't slowing as much as was hoped, wrote the bank in a note to clients.

These signs that the "process of wage disinflation may be slowing" meant that it was too early to declare victory on inflation, pointed out MUFG. While viewing the risks to inflation as "broadly balanced" Lombardelli added that she was more concerned about the consequences if the upside risks materialized.

This is complicated for the BoE given the risks appear to be stemming from the jobs market and wages when the quality of the data is clearly being questioned, stated the bank. If the Resolution Foundation is correct and there are potentially one million workers missing from the employment total it would certainly help explain some of the stickiness in the slowing of wage growth and justify a much slower pace of monetary easing.

But that caution from the BoE looks well priced at this stage with just about three 25bps rate cuts priced over the next 12 months, which is closely aligned to the pace in the United States. The ECB is expected to cut rates by twice as much over the same period.

If eurozone growth is weak enough to justify that one could argue that the United Kingdom curve shouldn't be as aligned with the US as it is and the impact of such weak growth in the eurozone would allow for the UK to ease more than is currently priced, added MUFG.

The UK exported goods and services valued at 188 billion pounds to the US in the four quarters to Q2 2024, which equated to 6.8% of the UK nominal gross domestic product over the same period.

The good news is that two-thirds of that total is services exports meaning goods exports that could be hit by tariffs amounted to 2.1% of GDP, which is smaller than in some countries in the eurozone. The other positive that could gain traction with President-elect Donald Trump is the overall position of trade in goods with the US -- the UK's 12-month surplus (US deficit) is very small at just 4.6 billion pounds and so Trump is unlikely to focus greatly on the UK-US trade imbalance, according to the bank.

These factors could help contain GBP depreciation if the trade conflict escalates in the new year although the risks remain skewed to the downside indirectly via weakening growth in the eurozone and globally that would see GBP suffer, noted MUFG.