Citi: Capital Flow Is Key

Citi think "the key determinant of the next leg in GBP will depend on the degree to which investors, especially real money, decide to allocate towards the UK. Our shorter-term positioning indicators show investors positioning in GBP as relatively light. More structurally, we see the long-term post-referendum underweight as being close to completely closed. The 'underweight' argument for GBP to move higher is weaker than before the election in 2019, however we do not see investors as structurally long either. Bigger picture positioning is poised for a potentially large move in either direction. This brings us onto the UK capital account. There remains structural uncertainty around the shape of UK-EU trade. Given the need for certainty for longer-term transactions, we are not convinced that M&A and FDI are going to come to the rescue to bail out the UK's large, and we predict widening, current account deficit. Instead, we think the capital inflows to the UK will be reliant on equity flows. The case here is strong in a vaccine-led cyclical recovery - UK equities have high beta to yields and value, and the UK should benefit the most from the vaccine trade as one of the countries hit the hardest by COVID. Yet it also requires plenty of stars to align, and leaves the UK BoP vulnerable to market volatility. Watching the flows will be key."