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Citi Adopts Tactically Bearish Stance on Sterling Ahead of New UK Prime Minister
Summary
Citigroup strategists are positioning for a decline in the British pound against the euro, citing a historical pattern of sterling weakness following the appointment of a new UK prime minister.
Citigroup has adopted a tactically bearish view on the British pound, anticipating that the euro could strengthen against sterling following the expected appointment of Andy Burnham as the UK's new Prime Minister. Analysts at the bank see a potential catalyst for GBP weakness emerging after July 20.
Political Precedent as a Catalyst
Citi's analysis points to a historical pattern where the euro has gained against the pound (EUR/GBP) following the last four changes in UK prime minister since Brexit. The bank suggests this trend is a function of market psychology, where initial optimism about a new leader is fully priced in before they take office, leaving room for disappointment once the realities of governing begin.
While the market has reacted positively to Burnham's recent comments on maintaining fiscal rules, Citi highlights that a high degree of uncertainty remains regarding his specific policies and cabinet appointments, including the crucial role of chancellor.
AdTrading Strategy and Key Levels
Strategists at the bank see scope for the EUR/GBP exchange rate to rise toward the 0.8450-0.85 area. They view any near-term dips in the currency pair as a potential opportunity to tactically position for this anticipated upside after the mid-July political transition.
However, Citi cautions that timing is critical for establishing short positions against the pound, primarily due to high carry costs. The analysis also noted that, based on its models, the EUR/GBP pair is currently screening as undervalued when compared to relative interest rates, further supporting their tactical view.