Citi Adopts Tactically Bearish Stance on Sterling, Citing New PM Catalyst

Citigroup has adopted a tactical bearish view on the British pound, advising clients that the currency is poised for a drop against the euro following the expected appointment of Andy Burnham as the new Prime Minister later this month.

The Tactical Shift

According to a note from the bank, analysts see scope for the euro to strengthen against sterling, with the EUR/GBP currency pair potentially rising toward the 0.8450-0.8500 range. The primary catalyst for this anticipated move is the official appointment of Andy Burnham, which is expected to occur after July 20.

Citi strategists noted that timing is key for shorting the pound due to high carry costs, making specific catalysts necessary. The bank also stated that the EUR/GBP pair is screening as undervalued based on relative interest rate differentials, adding a valuation-based argument to their short-term view.

Historical Context

The investment bank's call is supported by historical patterns observed during leadership transitions. Citi's analysis shows that all four prime ministerial changes since Brexit have been followed by an upward drift in the EUR/GBP exchange rate.

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Analysts suggest this pattern is a function of market sentiment, where initial optimism for a new leader is fully priced in by the time they take office. This leaves room for disappointment once the realities of governing and policy implementation set in, which can trigger currency weakness.

Market Outlook and Uncertainty

While the market has reacted positively to Burnham's recent comments about keeping fiscal rules intact, Citi highlighted that a high degree of uncertainty remains regarding his administration's specific policies. Key questions include whether he will keep Rachel Reeves as chancellor.

Given this outlook, Citi suggests that any near-term dips in the EUR/GBP rate could present a tactical opportunity for investors to position for a rise in the pair after the mid-July leadership change.