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

Citigroup has adopted a tactically bearish view on the British pound, anticipating a potential decline following the expected appointment of Andy Burnham as the new Prime Minister. Analysts at the bank see scope for the euro to strengthen against sterling, targeting a move in the EUR/GBP exchange rate toward the 0.8450-0.8500 range.

Political Catalyst

The key catalyst for this short-term view is the expected official appointment of a new prime minister on July 20. Citi analysts noted a consistent historical pattern where the pound has weakened against the euro following the last four changes in prime minister since Brexit.

According to the bank, this trend may be a function of market optimism being fully priced in as a new leader takes office. This leaves room for disappointment and a currency sell-off once the practical realities and challenges of governing set in.

Ad

Trading Strategy and Market View

While Citi maintains a fundamental bearish stance on sterling, it acknowledges that high carry costs make timing for short positions crucial. The bank suggests that any near-term strength in the pound, which would cause a dip in the EUR/GBP pair, could present a tactical opportunity to position for sterling weakness after July 20.

Markets have so far reacted positively to Burnham's comments about maintaining fiscal rules. However, Citi highlighted that a high degree of uncertainty remains regarding his specific policy actions and key appointments, including the chancellor. The bank also noted that based on its models, the EUR/GBP pair appears undervalued relative to interest rate differentials.