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Citi Turns Tactically Bearish on British Pound Ahead of New Prime Minister
Analysts at Citi have adopted a tactically bearish stance on the British pound, anticipating a period of weakness following the expected appointment of Andy Burnham as the new Prime Minister later this month. The bank suggests the euro could strengthen against sterling, targeting a move in the EUR/GBP currency pair toward the 0.8450-0.8500 range.
A 'Sell the News' Catalyst
Citi identifies the official appointment of the new Prime Minister, expected after July 20, as a key catalyst for the pound's potential decline. In a note to clients, the bank observed a historical pattern where the EUR/GBP exchange rate has drifted higher following all four post-Brexit changes in prime minister.
This trend, according to Citi, is likely a function of market optimism being fully priced in as a new leader takes office. Once the initial positivity fades and the realities of governing set in, there is significant room for disappointment, which can weigh on the currency.
AdPolicy Uncertainty Looms
While the market has reacted positively to Burnham's recent comments about maintaining fiscal rules, Citi highlights a "high degree of uncertainty" regarding his administration's actual policies. Key questions remain, including whether he will keep Rachel Reeves as chancellor, which adds to the potential for market volatility.
The bank suggests that any dips in the EUR/GBP pair in the coming days could present a tactical opportunity for investors to position for a subsequent rise after the leadership transition is complete. However, analysts also noted that timing is crucial for any short positions against the pound due to high carry costs. Citi's analysis also indicates that the EUR/GBP pair is currently screening as undervalued when compared to relative interest rates.