Pound Rises on Starmer Exit, Citi Still Sees Downside

The pound rose against most major currencies Monday after Prime Minister Keir Starmer formally resigned, ending weeks of political uncertainty. Sterling traded at $1.3258, up 0.38%, and at €1.1586, up 0.55%. The euro held at $1.1443.

The resignation removes a source of headline risk that had weighed on the currency since early summer. Markets had priced in a growing probability of an early departure after a series of by-election losses and internal party pressure. The actual announcement, delivered from Downing Street, was followed by a brief rally in gilt prices as traders trimmed the premium they had demanded for political uncertainty.

Citi remains bearish on the pound despite the move. The bank's FX strategy team sees the rally as a positioning-driven squeeze rather than a fundamental shift. Sterling's net long position among speculative accounts had climbed to multi-month highs before the resignation, leaving the currency vulnerable to a reversal if the next government signals a different fiscal path. Citi's year-end target for GBP/USD stands at $1.28, implying roughly 3.5% downside from current levels.

The next catalyst is the Conservative Party leadership contest, which will determine who succeeds Starmer. The frontrunner, according to betting markets, is former Chancellor Rachel Reeves, whose fiscal platform includes tighter spending rules and a slower pace of public investment. A Reeves premiership would likely keep the Bank of England's rate-cutting path intact, limiting sterling's upside, traders said. The contest is expected to conclude within eight weeks.

For now, the pound's gains look more like a relief rally than a trend change. The currency remains sensitive to UK gilt yields, which have fallen this month as the market prices in a higher probability of a BoE rate cut in November. The spread between 10-year UK and US yields has narrowed to 185 basis points, down from 210 basis points in early September, reducing the carry advantage that had supported sterling.

Sterling's next test comes with the August CPI print, due Wednesday. A reading below the BoE's 2% target would reinforce expectations for a November cut and could unwind some of Monday's gains. A hot number would push back against that timeline and give the pound more room to run.