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Citi Turns Tactically Bearish on British Pound Ahead of New PM Appointment
Summary
Citigroup analysts are advising clients of a short-term bearish outlook for the British pound, 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 the currency will weaken against the euro following the expected appointment of Andy Burnham as the new UK Prime Minister after July 20.
The Tactical Case
In a note to clients, Citi strategists said they see scope for the euro to extend its gains against sterling, targeting a move in the EUR/GBP exchange rate toward the 0.8450-0.85 area. The bank suggested that any near-term dips in the currency pair could present a strategic entry point to position for upside after the mid-July leadership change.
The analysts noted that timing is crucial for shorting the pound due to high carry costs, making a clear catalyst essential. According to the bank, the EUR/GBP pair is also currently screening as undervalued when measured against relative interest rates.
Historical Precedent
The primary catalyst for this short-term view is the expected official appointment of Andy Burnham as Prime Minister. Citi's analysis highlighted a historical pattern where the EUR/GBP pair has experienced an "upward drift" following all four Prime Ministerial changes since the Brexit vote.
AdThis trend is likely a function of market optimism being fully priced in by the time a new leader takes office, according to Citi. This leaves room for disappointment and potential currency weakness once the "reality sets in" and the new government faces the challenges of governing.
Market Sentiment and Uncertainty
The market has so far reacted positively to Burnham’s public comments about his intention to keep fiscal rules intact. However, Citi noted that a high degree of uncertainty remains regarding the new administration's specific policies.
Key questions, such as whether the current chancellor, Rachel Reeves, will be retained in her post, contribute to this uncertainty. This environment supports Citi's view that the pound's recent strength may be vulnerable to a reversal once the new leadership is in place.