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

Citigroup has turned tactically bearish on the British pound, anticipating a period of weakness against the euro following the expected appointment of Andy Burnham as the new Prime Minister. The bank's strategists see a historical pattern suggesting sterling is vulnerable to a sell-off once a new leader takes office.

A Political Catalyst

According to Citi, a key catalyst for the pound's direction will be the official appointment of Andy Burnham, which is expected after July 20. The bank noted that in all four previous post-Brexit prime ministerial changes, the euro has strengthened against the pound (EUR/GBP has risen).

Citi analysts attribute this pattern to market dynamics where initial optimism about a new leader gets fully priced in before they take office. This leaves room for disappointment and a currency correction once the political and economic realities of governing set in.

Trading Strategy and Levels

Strategists at the bank see scope for the EUR/GBP exchange rate to climb towards the 0.8450-0.8500 area. They suggest that any near-term strength in the pound, pushing the pair down towards that zone, could present a tactical opportunity to position for subsequent sterling weakness.

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This view is also supported by valuation metrics, as Citi's analysis indicates that the EUR/GBP pair is currently screening as undervalued when compared to relative interest rates.

Market Uncertainty and Risks

While the market has reacted positively to Burnham's comments about maintaining fiscal rules, Citi highlights that a high degree of uncertainty remains. Key questions, including who will be appointed as chancellor, are still unanswered.

The bank stressed that its bearish call is tactical, not a fundamental long-term view. The high carry costs associated with shorting the pound make timing crucial, necessitating a specific catalyst—like a change in leadership—to trigger the move.