What’s the Outlook for GBP in 2026?

• Currency traders are focused on the Bank of England’s next moves, as UK interest rate cuts could weaken sterling against the dollar and euro.
• Political risk, with new threats to the UK prime minister’s leadership, could lead to continued sterling volatility.
• Against the dollar and euro, the pound remains below levels seen before the vote to leave the European Union in 2016.

The pound rallied significantly against the US dollar in 2025, hitting multiyear highs, but lost ground against a resurgent euro in a volatile year for currency markets.

Economists are looking ahead to 2026 for potential triggers of sterling weakness, including weak UK growth, further interest rate cuts from the Bank of England, and ongoing political risk from UK fiscal policies.

2026 British Pound Forecast: At a Glance

• GBP vs USD: Modest upside as rate differentials narrow, Morningstar analysts say
• GBP vs EUR: Performance tied closely to UK economic growth in early 2026
• Key risks: Bank of England rate cuts, renewed political instability
• Key support: Fading fiscal risk premium after the Autumn Budget

How the Pound Has Performed Against the Dollar and Euro in 2025

Currencies can have a significant impact on investment returns for those who invest in overseas assets. In 2025, a strengthening pound lowered returns on dollar assets and flattered assets denominated in euros.

After a strong year for the pound, the GBP/USD exchange rate is now back to levels last seen in late 2021. With one pound currently buying USD 1.35, this is a far cry from autumn 2022, when the pound slumped during Liz Truss’s short-lived run as UK prime minister. Then, sterling briefly came close to parity against the dollar as global investors sold off UK assets.

Despite the pound’s gains this year, the exchange rate is still lower than before the Brexit vote, when a pound traded around USD 1.50.

The pound is also lower against the euro than it was before the Brexit vote in 2016. The UK currency weakened against the single currency in 2025, from EUR 1.21 to EUR 1.15. Despite short-lived rallies in 2022 and 2025, sterling is at a similar level against the euro to where it was five years ago.

Strong economic growth in countries like Portugal, Spain, Greece and Italy, as well as ambitious defense spending plans by Germany, have boosted the attractiveness of holding euro assets. The euro, as the second-most traded currency after the dollar, has also benefited from the shift away from US assets in the trade war era.

Hong Cheng, head of fixed income and currency research at Morningstar Wealth, says in her article, The Dollar’s Decline: Implications of a Weaker USD for Investors that the euro is not yet in a position to challenge the dollar’s status.

“The US dollar’s weakness in 2025 likely signals a turning point in its long cycle of strength—though not the end of its global dominance.”

She expects the Japanese yen to make the biggest gains of all the major currencies against the US dollar in 2026. The pound is forecast to make a gain of 1.5% against the dollar, with the euro making only modest headway after a very strong year in 2025.

Analysts at Bank of America say the euro could continue to rally against the dollar in 2026 but think sterling could also rally against the euro, if UK economic growth is better than expected in Q1. They add that with the Autumn Budget now over, the political risk premium attached to owning sterling will fade.

Bank of England Holds the Key to GBP Performance in 2026

A strong year for the pound against the dollar came despite a period when UK monetary policy was being loosened, with the Bank of England cutting rates four times in 2025.

Lower interest rates reduce the attractiveness of holding a country’s currency and assets, because higher yields can be found elsewhere. But it also depends on interest rate moves made by other central banks, such as the Federal Reserve.

With sluggish economic growth and a weakening labor market, the Bank of England could play a key role by lowering interest rates further to stimulate economic activity amid falling inflation.

But some aren’t convinced this will happen quickly. As the UK approaches its “terminal” or neutral rate, the Bank’s Monetary Policy Committee is likely to remain cautious.

Financial markets currently price in a further two rate cuts in 2026, but the exact timing is uncertain.

Sterling is being boosted in the short-term by this uncertainty, says Kathleen Brooks, research director at XTB “as investors price out the prospects of a series of rate cuts from the BOE in the coming months.”

UK Political Risk Could Still Weaken Sterling

Some experts point to domestic factors as influencing the pound’s next move.

While the Autumn Budget answered certain questions about the government’s fiscal plans, political uncertainty is still a live issue. With at least two separate political revolts hitting the UK prime minister, Keir Starmer in 2025, many anticipate 2026 bringing further turbulence as internal Labour Party politics come back to the fore and the May local elections potentially result in a formal leadership challenge. This could lead to a selloff in sterling, as it did at key points in 2025 when market anxiety over the government’s economic plans was at its highest.

“A challenge to Starmer’s leadership is an unambiguous downside risk to the pound,” says Morningstar international economist Grant Slade.

“Starmer remains among the most fiscally conservative of his party peers. Consequently, a successful leadership challenge would likely see a new chancellor installed with lessened commitment to fiscal consolidation than that of Rachel Reeves.”

He adds that a change of leadership would put pressure on the pound, although some of this is already priced in because of the prime minister’s low poll ratings.