Will the pound get stronger in 2026?
Last year saw a mixed performance in the pound, amid turmoil in the UK bond markets, monetary policy uncertainty, and US President Donald Trump’s whirlwind start to his second term.
GBP/USD slipped to a three-month low in January before rallying to its highest level in over three years by June, and then trimming these gains through the second part of the year. Overall, the pairing rose around 7% in 2025.
Meanwhile, GBP/EUR saw notable volatility but ultimately collapsed from a 33-month high in December 2024 to a 30-month low in November 2025, dropping roughly 5% over the course of the year.
Looking ahead at 2026, we expect the pound to face headwinds through the first half of the year, with weak growth, interest rate cuts, and political jitters all presenting risks.
GBP/USD could strengthen overall, if Trump’s pick for Federal Reserve Chair oversees a faster rate-cutting cycle. Meanwhile, GBP/EUR could trend lower, with the euro potentially benefitting from monetary policy divergence and US dollar weakness.
That said, geopolitical uncertainty, particularly between Europe and Russia, could infuse markets with volatility.
GBP forecast for 2026: Economic, political and monetary risks could all converge on the pound
Sterling heads into 2026 with plenty of potential headwinds brewing. As a result, we expect the first half of the year to be broadly negative for GBP exchange rates.
The primary risk to the pound is the Bank of England’s (BoE) policy approach. Although the BoE said future decisions would be a ‘closer call’ after cutting interest rates in December, the bank still made clear that it would loosen monetary policy further if conditions worsened.
Many economists expect UK inflation to ease, the labour market to slow, and growth to remain sluggish. If these predictions prove true, multiple rate cuts in 2026 could dampen the pound’s appeal.
Another notable factor in the 2026 outlook for GBP is the British political landscape. Prime Minister Keir Starmer staved off a leadership challenge when Chancellor Rachel Reeves delivered her bond-friendly budget in November, but the real test comes with the May local elections.
If Labour performs as poorly as expected in May, disgruntled MPs could attempt a coup. While Starmer is likely to survive an attempt to oust him, such a bout of political instability could be enough to pressure the pound, reminding markets of the chaotic final years of the Conservative government.
Additionally, signs of a dysfunctional government could introduce fresh risk premiums into the pound and UK bond markets. A rise in gilt yields could eat away at Reeves’s hard-earned headroom, a problem that could spiral into further fiscal tightening and more political discontent.
These gathering clouds of further rate cuts, sluggish growth and political instability could cast a shadow over the pound through the first half of 2026.
The second half of the year is far more uncertain, but there is at least the possibility of a GBP recovery.
Once the BoE concludes its cutting cycle, possibly in mid-2026, this could remove a key barrier for the pound. Sterling may enjoy further support if the BoE’s terminal rate is higher than US and Eurozone interest rates.
Although the UK economy is expected to remain subdued, lower borrowing costs could lead to a pick-up in economic activity in the second half of the year, which would be another boon for the pound.
Another possible positive could come from UK-EU trade relations. Keir Starmer has recently signalled that the UK could pursue ‘closer alignment’ with the EU single market. Such a shift in post-Brexit policy could be supportive for Sterling, as reduced trade frictions would likely improve the UK’s growth prospects.
Will the pound get stronger against the euro?
The GBP/EUR outlook for 2026 is deeply uncertain, with ongoing Russia-Ukraine peace talks clouding the outlook. All things considered, the risks for the pound euro exchange rate are slightly tilted to the downside through the first half of the year, with central bank divergence likely being the key catalyst.
While the pound faces the possibility of more interest rate cuts from the Bank of England, the euro could draw support from the European Central Bank’s (ECB) approach to policy. The ECB has concluded its cutting cycle for now, so EUR may attract investors as UK interest rates fall and European interest rates hold steady.
Likewise, if the Federal Reserve continues to cut interest rates, EUR could benefit from further central bank policy divergence and the currency’s strong negative correlation with a weakening US dollar.
However, one downside risk to the euro comes from growing geopolitical anxiety. Tensions between Russia and the EU remain high, while the relationship between Washington and Brussels is also strained, most recently amid Trump's threats to take Greenland 'one way or the other'.
Ongoing conflict in Ukraine could weigh on the euro, while a peace deal could provide EUR with support. At the same time, Trump's comments and actions on Greenland – and the wider impact on US-EU relations and European security – could have profound implications for the common currency.
Will the pound get stronger against the US dollar?
While both currencies face headwinds in 2026, we believe the pound could get stronger against the US dollar. That said, there are of course caveats, while market risk dynamics may also infuse GBP/USD with volatility.
The key factor for our GBP/USD forecast is central bank policy. Although both the BoE and the Fed are expected to cut rates in 2026, there is a chance that the Fed could follow a more dovish path.
Amid signs that tariff-related inflation is less persistent than feared and growing slack in the labour market, the US central bank recently signalled a more dovish approach in the months ahead. Additionally, Kevin Hassett – a Trump ally and advocate for lower interest rates – is highly likely to succeed Jerome Powell as Fed Chair in May.
If easing inflation, weaker employment and a dove chairing the Fed lead to an acceleration of rate cuts in 2026, the USD selloff could be steep. However, surprisingly stubborn inflation or a resilient jobs market – even with Hassett at the helm – could mean fewer cuts and a stronger dollar against the pound.
The more extreme downside risk to USD comes from the threats to the Federal Reserve's independence. The US Department of Justice launched a criminal investigation against Fed Chair Powell in January – a case Powell says is politically motivated. If the Fed's independence is eroded, the dollar could face a renewed confidence crisis.
Meanwhile, market risk appetite remains something of a wildcard in 2026. While lower global borrowing costs could cheer investors, thereby weighing on the safe-haven US dollar, geopolitical events could sour the mood.
Many were hopeful that 2026 would bring peace in Ukraine and cooling tensions internationally. However, following the US invasion of Venezuela at the very start of the year, along with Donald Trump’s threats to Colombia, Cuba, and Greenland, there is a growing fear of further conflict.
A Russia-Ukraine peace deal could boost risk appetite, while a collapse or pause in negotiations could lead to risk aversion. In addition, growing US-EU animosity, trade disputes, or China-Taiwan tensions could all weigh on risk sentiment and favour the safe-haven dollar over the increasingly risk-sensitive pound.
Concerned about how shifting exchange rates could impact you in 2026?
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