Outlook
The pound is likely to stay within a tight band for the near term, with a modest upside bias from resilient UK data and policy divergence between the Bank of England (BoE) and the Federal Reserve, but gains may be capped by a light UK data calendar and political risk ahead of local elections.
Key drivers
- Resilient domestic data: UK Retail Sales and PMI (Purchasing Managers’ Index) beat forecasts, underpinning pound demand.
- Inflation persistence: December inflation at 3.4% keeps BoE from moving quickly on rates, supporting the currency.
- Global policy divergence: BoE yields remain comparatively higher than US yields, aiding GBP as markets price fewer Fed cuts.
- Political risk: Local elections in May 2026 could raise volatility and test investor sentiment toward the UK government.
- Limited impact from UK-China deals: despite new agreements in Beijing, markets expect only a modest near-term effect on the economy.
Range
GBP/USD at 1.3808, 3-month average 1.3355; range 1.3019 to 1.3837 (GBP/USD about 3.4% above its 3-month average). GBP/EUR at 1.1538, 3-month average 1.1441; range 1.1322 to 1.1551 (about 0.8% above its 3-month average). GBP/JPY at 211.5, 3-month average 208.2; range 200.0 to 213.8 (about 1.6% above its 3-month average).
What could change it
- Surprise UK data: notably stronger or weaker prints could shift BoE expectations.
- BoE guidance: any signals at the February meeting indicating future rate moves.
- Fed policy: further changes to US rates or shifts in dollar strength.
- Political developments: local election outcomes affecting investor confidence.
- Global risk appetite: risk-on could push the pound higher; risk-off could weigh on it.
