Citibank warns: The "most vulnerable moment" for the British pound is in May, with political turmoil and rate cut expectations putting double pressure on it

Citigroup strategists warn that the biggest test for the British pound will arrive in the next two months. At that time, political uncertainty in the UK and expectations of Bank of England rate cuts will resonate, exerting significant downward pressure on the pound.

The bank’s strategist Daniel Tobon stated that although the market has “initially perceived” these two major risks over the past week, the true downside risk window will open on the eve of the local elections in early May. Polls indicate that the Prime Minister Stamer’s party may face pressure, with its leadership already shaken, and political uncertainty is expected to intensify further.

Meanwhile, the Bank of England is expected to restart rate cuts in the coming months. Last week, the bank unexpectedly decided to hold rates steady by a narrow margin, but the market generally believes the easing cycle has not yet ended.

Political and Monetary Policy Risks Intertwined

Citigroup strategist Daniel Tobon pointed out that political uncertainty and accommodative monetary policy are the two main reasons for shorting the pound. These two themes will converge between April and May, at which point the pound will experience “a larger reaction.” He said:

“It’s too early to seriously bet on these scenarios now; April and May are the moments when these themes come together, and that’s the window we want to participate in.”

This week, the pound rebounded against the dollar and recovered some ground against the euro. The previous decline was triggered by the resignation of a senior member of Stamer’s team, bringing political uncertainty back into focus. Given that the pound’s gains this year have mainly been driven by passive support from a weaker dollar, many institutions believe that expressing UK risk exposure through EUR/GBP is currently a more efficient trading approach.

Rate Cut Expectations Rise

Options market signals show that from March onward, EUR/GBP selling will gradually increase, with the market preparing in advance for the Bank of England’s rate cut actions. Citigroup strategist Daniel Tobon expects that the next rate cut could occur as early as April, with additional cuts in July and November, with a clear pace of easing that exceeds current market pricing.

However, he also pointed out that the final results of the local elections will be clear by then. He said:

“What could truly trigger volatility is the weeks leading up to the elections.”

Citigroup’s bearish stance on the pound is more aggressive than market consensus. Its target of the pound falling to 88 pence against the euro by the end of June aligns with the median of Bloomberg surveys, but it further predicts a drop to 90 pence by the end of September, indicating ongoing pessimism about the medium-term outlook for the pound.

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