06:32 AM EDT, 05/08/2025 (MT Newswires) -- An important announcement late Wednesday was from United States President Donald Trump, who posted on social media that he would hold an Oval Office news conference the following day to discuss "a major trade deal with representatives of a big, and highly respected, country," said MUFG.

While President Trump didn't specify which country was involved, it has since been reported by the media that it's the United Kingdom, wrote the bank in a note to clients. The U.K. and U.S. have been in intensive discussions about an economic agreement that would reduce the impact of some tariffs, with a team of British officials in Washington to negotiate terms this week.

Earlier this week the U.K., announced a new major trade with India as well. The British media are reporting that a "heads of terms" agreement has been reached which is a "substantive" step towards a full trade deal. The U.K. has been pushing to get a trade deal signed before the U.K.-EuropeanUnion Summit later this month.

It has been reported that the trade agreement could lower sector-specific tariffs applied to the U.K. on autos, steel and aluminium from the current rates of 25%, although the 10% universal tariff rate could remain in place, pointed out the bank.

Trade deal optimism has helped sterling (GBP) to strengthen overnight, although gains have been modest, perhaps reflecting the close proximity to Thursday's Bank of England policy meeting, and lack of details so far, stated MUFG.

There is still a risk of a more dovish policy update from the BoE on Thursday posing downside risks for sterling, that could deliver a setback after the recent rebound, added the bank. The U.K. rate market has already moved to price in around 39bps of BoE cuts by the June MPC meeting, highlighting that there is already a strong expectation that the BoE will signal a faster pace of easing going forward.

The dovish repricing that has already taken place should help to dampen any sterling sell-off on the back of a change in guidance on Thursday from the BoE unless those expectations are reinforced further by discussions over delivering a larger 50bps cut if needed.

A larger 50bps as early as Thursday can't be ruled out either although that appears highly unlikely to MUFG.

On the other hand, sterling will derive more support if the BoE continues to signal that it remains comfortable with the current quarterly pace of rate cuts, and financial markets, volatility continues to ease encouraged by building investor optimism over a trade deal between the U.S. and U.K.

A trade deal could ease pressure on the BoE to speed up the pace of rate cuts if the negative impact on the U.K. economy is dampened, according to MUFG. Sterling was hit hard last month by the sharp jump in financial market volatility triggered by the initial fallout from President Donald Trump's tariff plans.

It has triggered an unwind of carry trades that reinforced the sell-off in higher-yielding currencies such as sterling. At the same time, unfavorable external conditions have made it more challenging for countries that rely more on external financing, such as the U.K., whose current account deficit totaled just under 3% of GDP last year.