Citi Turns Tactically Bearish on British Pound Ahead of PM Appointment

Citigroup strategists have adopted a short-term bearish view on the British pound, anticipating a period of weakness following the expected appointment of Andy Burnham as the UK's Prime Minister. The bank identified the leadership change as a key catalyst that could push the euro higher against sterling.

Historical Precedent Sparks Caution

According to a note from Citi, the catalyst for its tactical position is the upcoming formal appointment of the new prime minister, expected after July 20. The bank's analysis highlights a historical pattern where the euro has strengthened against the pound (an upward move in the EUR/GBP currency pair) following the last four post-Brexit prime ministerial changes.

Citi's strategists suggest this trend may be due to market optimism being fully priced in before a new leader takes office. Once the realities of governing begin, there is significant room for disappointment, which can weigh on the currency.

Positioning for Sterling Weakness

While Citi holds a fundamental bearish view on sterling, it noted that high carry costs make timing short positions difficult without a clear trigger. The upcoming political transition provides such a catalyst. The bank sees scope for the EUR/GBP pair to move toward the 0.8450-0.85 area.

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Strategists at the bank said they would look to use any near-term strength in the pound—which would be reflected as a dip in the EUR/GBP rate—as an opportunity to position for a subsequent rebound in the pair after the new prime minister is in place.

Market Uncertainty Remains

Despite the bearish outlook, Citi acknowledged that the market has so far reacted positively to Burnham's comments about maintaining fiscal discipline. However, a high degree of uncertainty remains over his specific policy actions and key cabinet appointments, including whether he will keep the current chancellor, Rachel Reeves.

Citi also noted that, based on its models, the EUR/GBP pair is currently screening as undervalued when compared to relative interest rates, potentially supporting the case for a move higher.