Citi Turns Tactically Bearish on British Pound Ahead of New Prime Minister

Citigroup has adopted a tactically bearish view on the British pound, forecasting potential weakness for sterling after Andy Burnham is expected to be officially appointed as the UK's new Prime Minister later this month. The bank sees a potential rise in the EUR/GBP exchange rate, citing historical precedent and the risk of policy disappointment.

Citi's Short-Term Sterling Call

In a note to clients, Citi strategists said they see scope for the euro to strengthen against the pound, targeting a move in the EUR/GBP exchange rate toward the 0.8450-0.8500 area. The bank views any potential downside in the pair as a tactical opportunity to enter long positions.

The bank emphasized that the timing for any short sterling positions is critical due to high carry costs. As a result, specific catalysts are necessary to trigger a sustained move against the pound.

Political Catalyst and Historical Precedent

The primary catalyst identified by Citi is the political transition, with Burnham's appointment expected after July 20. Analysts at the bank pointed to a historical pattern, noting that the last four post-Brexit changes in Prime Minister were all followed by an upward drift in the EUR/GBP pair.

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According to the report, this trend may be a function of market optimism for a new leader being fully priced in before they take office. This leaves room for disappointment once the "reality sets in" and the challenges of governing become clear.

Market Outlook and Uncertainty

While the market has so far reacted positively to Burnham's comments about maintaining fiscal rules, Citi highlighted a "high degree of uncertainty" regarding his eventual policy decisions. Key questions remain, including whether the new prime minister will keep the current chancellor, Rachel Reeves, in her post.

From a valuation perspective, Citi's analysis suggests the EUR/GBP pair is screening as undervalued versus relative interest rates. The bank stated it would look to use any dips in the currency pair in the coming days to tactically position for potential upside after the mid-month political transition.