Bank of America Global Research discusses GBP outlook ahead of next Thursday's June BoE meeting.

"The upcoming Makerfield by-election on 18 June is the next key event for UK's political and fiscal outlook. There are many scenarios, but if Andy Burnham were to win, he would be eligible to stand in a Labour leadership contest, in which a Survation poll indicates he is favourite to win. A loss for Burnham could mean either status quo or a leadership challenge with an alternative candidate standing from the soft left. Political/policy uncertainty can weigh on growth," BofA notes.

"GBP vol premium remains muted with front-end vol being driven by the BoE rate decision and the proximity of the FOMC. Vol remains the best vehicle to express political concerns. We remain short EUR/GBP, but the case for hedging with long vega positions seems prudent. In rates, we look for 2s10s curve steepening in Gilts. At the front, pricing implies more than our base case of two Bank Rate hikes to terminal, leaving room to rally. Failure by the MPC to validate the hiking path (as currently priced in) at next Thursday's meeting should reinforce the steepener. Further out, the long-end should trade sensitively to political risks into the by-election," BofA adds.