Sterling has been rebounding ahead of Thursday's Bank of England policy meeting after the heavy sell-off in January, said Mitsubishi UFG.

The BoE is scheduled to release its policy statement at 7 a.m. ET on Thursday.

After hitting a high of 0.8474 on Jan. 20, EUR/GBP has fallen back towards levels in place at the start of this year -- closer to the 0.8300 level, wrote the bank in a note to clients. Similarly, cable has climbed back up to the 1.2500 level after hitting a low of 1.2100 on Jan. 13.

Sterling-specific selling intensified last month when gilt yields hit fresh highs fuelling concerns over the health of the public finances in the United Kingdom, pointed out MUFG. Those concerns have since subsided as gilt yields have fallen alongside United States yields since the middle of last month.

The 10-year and 30-year gilt yields have since both fallen sharply by around 50bps, stated the bank. It still leaves yields in the U.K. higher than in other major economies which helps to keep sterling attractive as a carry currency especially with volatility easing back again after last month's sharp sell-off.

It was one of the main reasons why sterling was one of the strongest-performing G10 currencies last year, added MUFG.

The BoE's cautious approach to cutting rates has been an important reason why yields have remained at higher levels in the U.K. MUFG expects the BoE to deliver another 25bps rate cut on Thursday lowering the policy rate to 4.50%.

However, the policy rate spread over the European Central Bank will still be "substantial" at 1.75%. The case for further BoE rate cuts has been supported by the sharp slowdown in the U.K. economy in the second half of last year when growth ground to a halt, noted the bank.

MUFG expects the BoE to revise lower its forecast for gross domestic prodcut growth this year from 1.5% set back in November. There has also been more evidence of softening labor market conditions which should give the BoE more confidence that wage growth will slow going forward and create more room to make the policy rate less restrictive.

Core and services inflation fell sharply in December but it was likely exaggerated by the airfares component related to the timing of data collection. So MUFG doesn't expect the BoE to overemphasize the positive December consumer price index report.

In these circumstances, the bank sees the BoE sticking to its "gradual approach to removing monetary policy restraint" which has been consistent with a rate cut every quarter since the easing cycle started in August. MUFG predicts the BoE will deliver 100bps of easing this year.

While it will diminish the sterling's carry attractiveness, the bank doesn't think the BoE's update Thursday will be sufficient to trigger a bigger sterling sell-off unless there is a significant dovish surprise indicating a faster pace of easing.