Pound Sterling: "May is Unlikely to be Forgiving" says BofA

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April was a good month for the pound, but buckle up for May, warn currency analysts.

The British pound strengthened through April, and history says that's not random: seasonality has a very powerful hold on the pound at this time of the year.

Pound sterling regularly and dependably rallies against most peers due to seasonal factors in April: Kamal Sharma, FX Strategist at Bank of America, says this is because a significant number of UK-listed companies that earn overseas repatriate revenues to pay GBP dividends at this time of the year.

That creates real non-speculative demand for pound sterling.

Other drivers played their part too: Risk sentiment improved as traders saw the worst of the Middle East conflict pass by.

Domestic economic data has surprised for the better, which boosted UK interest rates relative to elsewhere. In fact, in the G10 complex, Britain's economic pulse surprised to the upside by more than any other country.

"This combination in April - lower market volatility and widening spread has helped the dividend flow story," says Sharma.

The flip side is that seasonality doesn't have a strong pull in April alone, as May is also a dependable month. However, it tends to be a month of decline for the pound: BofA data shows that over a 15-year spell, the pound has tended to lose approximately one per cent of its value against the dollar in May.

Against the euro, there's a smaller loss on the ledger, and it's only against the Australian and New Zealand dollar that the pound tends to advance.

"Sterling rallies are selling opportunity before 7th May local elections and bearish seasonality next month," says a weekly strategy note from Société Générale.

BofA's Sharma explains May is historically bad for GBP, particularly versus USD, as volatility tends to rise (which also explains why the pound ekes out gains against the high-beat Australian and New Zealand dollars).

This year will see May bring additional risks: local and devolved government elections and the resultant political noise pose risks.

"An election drubbing for Labour could bring down the premiership of Keir Starmer," says Société Générale.

Starmer's Labour Party is expected to lose heavily in Scotland, Wales and across England's councils. With the PM already under pressure over the Mandelson affair, talk of his replacement will likely grow in the weeks following the vote.

"The risk of a leadership change in Downing Street is growing. Markets are wary that a new prime minister – and, by extension, chancellor – might mean more borrowing and looser fiscal rules," says James Smith, Developed Markets Economist at ING Bank.

Former Deputy Prime Minister Angela Rayner is considered the favourite to replace Starmer in the event he is ousted. She represents a more socialist Labour politics, which will be potentially detrimental for the country's finances.

"May is unlikely to be forgiving," says Sharma. "With a little over one week to go, markets appear to have taken a relaxed view to the May local elections. We see some value in owning some optionality ahead of the event on the likelihood that political noise will intensify in the days following the results."