Citi sees GBP gains as short-lived ahead of October budget risks

Citi predicts that the EUR/GBP exchange rate may see short-term gains ahead of the Bank of England's meeting in October, according to their latest report. The bank anticipates the BoE will maintain current interest rates at their meeting, with a 6-3 vote split among policymakers. Citi's Economic team estimates only 5 basis points of rate hikes are priced into markets, suggesting a hawkish stance could slightly bolster the British pound.

This is mainly due to the currency's attractiveness for foreign investors when rates remain appealing. However, Citi warns that this GBP strength may prove temporary. The bank points out that recent weakness in government bonds during the budget reference period could limit fiscal flexibility as the UK prepares for its budget on October 28.

Additionally, uncertainty surrounding Chancellor Jeremy Hunt's policies could keep investors on edge in the coming month. Citi notes that as market focus shifts towards the budget in the weeks ahead, traders may use the current GBP strength to start positioning themselves against potential downside risks should the budget prove less than favorable.