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

Citigroup has shifted to a tactically bearish stance on the British pound against the euro, citing the upcoming change in UK political leadership as a potential catalyst for sterling weakness. Strategists at the bank see scope for the euro to strengthen against the pound in the near term.

Political Change as a Catalyst

According to Citi, a key factor in its forecast is a historical pattern observed following the last four post-Brexit prime ministerial changes. In each case, the EUR/GBP currency pair experienced an upward drift after the new leader was appointed.

The bank suggests this trend is a function of market optimism being fully priced in as a new leader takes office, which leaves room for disappointment once the practical realities of governing begin. The expected appointment of Andy Burnham as Prime Minister after July 20 is viewed as the next potential trigger for this dynamic.

Market Positioning and Outlook

Citi strategists believe the euro could extend its gains toward the 0.8450–0.8500 range against the pound. They noted that timing is crucial for shorting sterling due to high carry costs, making a clear catalyst necessary.

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In light of this, the bank's tactical recommendation is to use any near-term weakness in the EUR/GBP pair as an opportunity to position for a subsequent rise after July 20. Citi also noted that, based on its models, the currency pair appears undervalued when compared to relative interest rates.

Uncertainty Remains

While the market has reacted positively to Burnham's public comments about maintaining fiscal rules, Citi highlighted that a high degree of uncertainty remains regarding his specific policy actions. Key questions include whether he will retain the current chancellor, Rachel Reeves.

This uncertainty, combined with the historical precedent of post-appointment currency moves, underpins the bank's view that the pound's recent strength may be vulnerable to a reversal once the new administration is in place.