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

Citigroup has adopted a tactically bearish stance on the British pound, anticipating a period of sterling weakness against the euro following the expected appointment of a new UK Prime Minister later this month.

A Tactical Call on Sterling

Analysts at Citi see potential for the euro to strengthen against the pound, projecting the EUR/GBP currency pair could move toward the 0.8450–0.8500 range. The bank said in a research note that this is a tactical view, emphasizing that high carry costs associated with shorting the pound make timing and specific catalysts essential for such a trade.

According to the bank's analysis, the EUR/GBP pair also appears undervalued when measured against relative interest rate differentials, suggesting a potential for the cross to move higher.

The Political Catalyst

The primary catalyst for the trade, according to Citi, is the expected official appointment of Andy Burnham as Prime Minister after July 20. The bank’s research highlighted a historical pattern where the EUR/GBP pair has tended to drift higher following all four prime ministerial changes in the post-Brexit era.

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Citi's analysts suggest this pattern may occur because market optimism is fully priced in by the time a new leader takes office. This leaves room for disappointment and a currency sell-off "once reality sets in."

Market Uncertainty Remains

While the market has reacted positively to Burnham's initial comments about keeping fiscal rules intact, Citi noted that a "high degree of uncertainty remains" over his administration's specific policies. A key question is whether he will keep Rachel Reeves as Chancellor.

Given this outlook, Citi stated it would view any downside in the EUR/GBP pair in the coming days as a potential opportunity to tactically position for a rise after the mid-July political transition.