Citi Turns Tactically Bearish on British Pound Ahead of Expected PM Appointment

Citigroup has adopted a tactically bearish outlook on the British pound, anticipating a period of weakness following the expected appointment of Andy Burnham as the new Prime Minister. Analysts at the bank see potential for the euro to strengthen against sterling, but noted that timing is a key consideration for investors.

Political Catalyst for Sterling Weakness

Citi's analysis points to a potential catalyst for a weaker pound after July 20, when Burnham is expected to be officially appointed. The bank's strategists highlight a historical pattern where the EUR/GBP currency pair has drifted upward following all four prime ministerial changes in the post-Brexit era.

This trend, according to Citi, may be a function of market optimism being fully priced in as a new leader takes office. Once the realities of governing set in, there is often room for disappointment, which can weigh on the currency. While the market has reacted positively to Burnham's comments about maintaining fiscal rules, a high degree of uncertainty remains regarding his specific policies and cabinet appointments, including the role of chancellor.

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Trading Strategy and Market View

Given the high carry costs associated with shorting the pound, Citi emphasized that a clear catalyst is necessary to initiate such positions. The bank sees scope for the EUR/GBP pair to move toward the 0.8450-0.8500 area.

In light of this view, Citi's strategists suggested that any near-term strength in the pound (a dip in the EUR/GBP pair) could present a tactical opportunity. The bank indicated it would look to use such downside moves to position for an eventual rise in EUR/GBP after the new prime minister is in place. Additionally, Citi noted that the pair appears undervalued when measured against relative interest rates.