Citi maintains a long position in EUR/GBP

Citi analysts anticipate the Bank of England will maintain its "gradual and careful" approach, potentially removing hawkish elements due to recent UK economic weakness, a marginally dovish signal. The bank maintains a long EUR/GBP position and views the upcoming May CPI data as crucial, particularly core and services inflation figures. Recent GBP weakness has left long positions underwater against the euro, with Citi expecting further position adjustments and marginally negative catalysts for the pound, citing concerns about the UK labor market and fiscal tightening.

Analysis

Citigroup's analysis indicates the Bank of England is likely to adopt a marginally dovish stance, potentially by maintaining its "gradual and careful" guidance while removing hawkish caveats in light of recent UK economic weakness. This perspective supports Citi's ongoing long EUR/GBP position, with the pair noted at 0.8547. The upcoming May Consumer Price Index (CPI) data, due on June 18, is identified as a pivotal event for currency markets, with expectations set for core inflation at 3.5% year-over-year and services inflation at 4.8%. The British pound's recent underperformance has reportedly caused long positions initiated in early May to become "completely underwater" against the euro, even as GBP/USD has maintained elevated levels. Citi anticipates further unwinding of these positions and projects that forthcoming catalysts will be "marginally negative" for sterling. The bank leans towards the view that the UK may be at the onset of a broader economic deterioration, rather than experiencing a transient slowdown, citing concerning trends in the UK labor market. Additional pressures on the pound are expected from fiscal concerns and impending budget tightening, potentially contributing to sustained currency weakness.

Key Decisions for Investors

• Investors should monitor the Bank of England's upcoming communications for any removal of hawkish language, as this could signal a dovish pivot and exert further pressure on the pound.
• The May CPI data release on June 18, particularly core inflation (expected at 3.5% YoY) and services inflation (expected at 4.8% YoY), will be a critical determinant for near-term GBP direction and warrants close observation.
• Given Citi's projection of further GBP weakness due to concerns over economic deterioration, labor market issues, and fiscal pressures, investors with long GBP positions, especially against the euro, should consider reassessing their exposure and potential hedging strategies.
• Traders should factor in the potential for ongoing GBP position unwinding and further marginally negative catalysts for sterling when formulating currency allocation decisions, particularly in pairs like EUR/GBP.