The first half of 2026 has been volatile for the pound amid the outbreak of the US-Iran war, shifting interest rate expectations, and the resignation of UK Prime Minister Keir Starmer.
With GBP/USD having struck a four-year high in late January, the pairing then slumped to a three-month low in March and a seven-month low in June, with the US dollar boosted by the US-Iran war, Federal Reserve rate hike bets and a global tech selloff.
Meanwhile, GBP/EUR wavered higher through H1 2026, starting the second half of the year by striking a one-year high. USD strength and concerns about the health of the Eurozone economy have weighed heavily on the euro, as well as a scaling back of European Central Bank (ECB) rate hike bets.
Looking at the months ahead, the GBP outlook for 2026 remains deeply dependent on whether the fragile interim peace agreement between the US and Iran can lead to a permanent end to hostilities, and how the fallout from the war impacts inflation and economic growth.
In the near term, we expect the pound to remain vulnerable to volatility amid domestic political developments, the tentative peace in the Middle East, and uncertainty over the UK’s interest rate outlook.
Sterling may enjoy relative support, particularly if the Bank of England (BoE) tightens policy and the US-Iran peace holds. However, the narrative is not cleanly bullish for GBP. The pound remains exposed to bouts of weakness if political risk rises, growth concerns deepen, or rate expectations move again in the UK.
GBP/USD could weaken further if the Federal Reserve hikes interest rates while the BoE holds steady, especially if safe-haven demand continues to support the dollar. That said, Sterling could regain ground later in the year if geopolitical risks ease, US rate expectations stabilise, and UK political uncertainty recedes.
Meanwhile, GBP/EUR could remain comparatively resilient if the ECB signals it is done raising rates, or if Eurozone growth concerns and broader US dollar strength continue to weigh on the single currency. Even so, further gains may be limited unless UK political and fiscal risks are contained.
GBP forecast for 2026: Middle East aftermath and UK politics to determine the pound’s direction
The pound enters the second half of 2026 with an uncertain but potentially supportive outlook, depending heavily on the long-term impacts of the US-Iran war and the policy direction of presumptive Prime Minister Andy Burnham.
The eruption of violence in the Middle East triggered unpredictable movement in the pound through the first half of this year, and the conflict could continue to infuse the currency market with volatility in H2. Tensions remain fraught, raising concerns about the sustainability of the current interim peace deal and whether a lasting agreement can be reached.
Even if the conflict is truly over, the economic impacts have yet to feed through into the UK economy. Both inflation and growth will be key to the GBP outlook. Persistent price pressures could encourage the BoE to hike interest rates later this year, which could support Sterling, while growth concerns could be a headwind for the currency.
Another notable factor in the 2026 outlook for GBP is the British political landscape. Following his decisive victory in the Makerfield by-election, former Greater Manchester Mayor Andy Burnham is on course to become Prime Minister as early as mid-July.
A quick, clean transition of power could support the pound in the near term, with investors favouring certainty over a prolonged Labour leadership contest. However, Burnham’s premiership could still be significant for GBP, with markets likely to watch closely as he assembles his cabinet and sets the tone on fiscal policy.
A key test for Sterling will be how bond markets respond to Burnham’s economic agenda. The Labour Conference in September and the Autumn Budget, expected in November, could shape investor confidence in the UK’s policy direction. If Burnham can navigate the difficult political and fiscal environment while maintaining market confidence, Sterling could end the year on stronger footing. Conversely, if his plans unsettle bond markets, the pound could face a turbulent end to 2026.
As a result, Sterling remains vulnerable to bouts of volatility, particularly if geopolitics, fiscal policy or interest rate expectations shift unfavourably. The best outcome for the pound would likely be lasting peace in the Middle East, a slightly more hawkish BoE as the UK economy proves resilient, and a Burnham government that reassures markets on fiscal credibility. However, the outlook remains fragile, and the path ahead is highly contingent.
Will the pound get stronger against the euro?
GBP/EUR could hold strong in the second half of 2026, although it may struggle to push higher. While the pound may be supported by diverging BoE-ECB expectations, UK political and fiscal risks could cap Sterling’s gains. In addition, the euro may recover if geopolitical tensions ease, energy prices fall, or a weaker US dollar lifts demand for the single currency.
The GBP/EUR exchange rate wavered higher through the first half of 2026, striking a one-year high of €1.1657 on 1 July and appreciating almost 1.7% since the start of the year. US dollar strength, Eurozone growth concerns and BoE-ECB policy divergence ultimately weighed on the common currency, and these factors could all continue to support the pound against the euro in the second half of 2026.
A key factor for GBP/EUR will be central bank policy. Sterling is poised to strengthen if the BoE tightens policy later in the year, while the single currency could soften if the ECB signals it’s done with rate hikes. However, decision-making will be driven by the data, so the policy paths will depend upon how the inflation outlook unfolds.
Meanwhile, relative growth prospects could also shape the pound euro exchange rate. The Eurozone remains vulnerable to weak demand, higher energy costs and the economic fallout from geopolitical uncertainty, while the UK economy may appear comparatively resilient if inflation does not derail consumer spending and business confidence. If investors continue to see the UK outlook as more stable than the Eurozone’s, GBP/EUR could remain underpinned.
Finally, USD strength may keep EUR muted, due to the euro’s inverse trading relationship with the US dollar.
Will the pound get stronger against the US dollar?
We expect GBP/USD to remain vulnerable in the near term, with scope for a modest recovery by the end of the year. However, whether the pound gets stronger against the US dollar through the second half of 2026 depends heavily on the shaky peace deal in the Middle East, as well as monetary policy and political developments in the US and the UK. Therefore, the outlook remains deeply uncertain.
GBP/USD trended lower through the first half of 2026, depreciating by almost 1.5% to end H1 at around $1.3250. However, the exchange rate saw some big swings – hitting highs of around $1.3870 and lows of $1.3140. The US-Iran war and drastic repricing of US and UK interest rate expectations led to the volatility.
These factors remain crucial through the remainder of 2026. If ongoing negotiations between the US and Iran lead to a stable peace, Sterling could rise against the safe-haven dollar. However, flaring tensions – or a fresh geopolitical shock – could sour the mood and see USD surge.
Meanwhile, the impacts of the war and subsequent oil price spike will continue to feed through into the UK and US economies. Although the UK is highly exposed to global energy prices, the BoE’s outlook remains two-sided. Higher energy costs could lift inflation and raise the risk of a BoE hike, but a loosening labour market and weaker activity could limit the case for tighter policy.
By contrast, the Federal Reserve’s latest projections suggest US inflation could remain further above target while growth stays comparatively resilient. This leaves the Fed’s policy outlook looking more clearly hawkish than the BoE’s, which could keep GBP/USD under pressure if markets price a greater chance of Fed tightening.
That said, Sterling could recover later in the year if geopolitical risks ease, oil prices fall, US inflation expectations stabilise and UK political uncertainty recedes.
US politics could also drive dollar volatility as the November midterm elections approach. Democratic gains in Congress could support USD if markets see them as a check on President Trump’s more unpredictable policies. However, if the result improves global risk appetite and reduces safe-haven demand, this could instead weigh on USD.
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