Citi Adopts Tactically Bearish Stance on British Pound Ahead of New PM Appointment

Citi has turned tactically bearish on the British pound, anticipating potential weakness against the euro following the expected appointment of Andy Burnham as the UK's new Prime Minister. The bank identified the period after July 20 as a potential catalyst for a downturn in sterling.

A Tactical View on EUR/GBP

In a note to clients, Citi strategists outlined a scenario where the euro could extend gains against the pound, with the EUR/GBP currency pair targeting the 0.8450-0.85 area. The bank's view is tactical, suggesting that any near-term strength in the pound (a dip in the EUR/GBP rate) could offer an opportunity to position for a subsequent rise in the pair.

Analysts at the bank noted that timing is a key consideration for initiating short positions against the pound due to high carry costs. As such, a specific catalyst is necessary to trigger the trade.

Political Transition as Market Catalyst

The expected appointment of Andy Burnham as Prime Minister is seen as that primary catalyst. Citi's research highlights a historical pattern where the EUR/GBP exchange rate has drifted higher following all four post-Brexit changes in Prime Minister.

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The bank suggests this trend may be a function of market psychology. Optimism about a new leader tends to be fully priced in as they take office, creating "room for disappointment once reality sets in," according to the note.

Uncertainty and Valuation

The market has so far reacted positively to Burnham's comments about keeping UK fiscal rules intact. However, Citi pointed to a "high degree of uncertainty" regarding his administration's specific policies, including the key appointment of who will serve as chancellor.

Underscoring its tactical view, Citi also noted that the EUR/GBP pair appears undervalued when measured against relative interest rates. This valuation suggests that underlying fundamentals could also support a move higher for the euro against sterling.