It wants to bring the qualities of a German premium brand to a wider customer base at a lower price. The 200bhp RCZ will be its equivalent of the Audi TT, but priced lower to be accessible to a wider market.
Peugeot boss Jean-Philippe Collin told the Sunday Times that the RCZ would "help the Peugeot brand, pulling it upwards".
Peugeot and Citroen want to cover 90% of the market, compared with 75% today.
Despite slow sales of their large saloons, the C6 and 607, both will continue to offer flagship models, although their management has noted that customers' tastes are moving away from saloons into SUVs and crossover models.
Previous attempts by French carmakers to encroach into the UK's premium segment dominated by German brands have failed.
Renault withdrew its Vel Satis executive-saloon wannabe from the UK market due to so few sales, and annual sales of the Peugeot 607 and Citroen C6 barely break into triple figures.