Outlook
The pound remains muted and rangebound as markets price in tariff-related recession risks and a cautious BoE stance. Recent UK data showed unemployment fell in November while wage growth cooled, dampening domestic inflation pressures and keeping sterling within a cautious, sideways drift. The BoE is expected to trim rates gradually in 2026 (two 25bp cuts to around 3.25%), with inflation easing toward the 2% target and growth slowing to around 0.9% next year. Global trade tensions and geopolitical risk continue to cap upside for the currency, unless new data or policy signals tilt sentiment more decisively.
Key drivers
- BoE policy path: Two 25bp cuts in 2026, taking Bank Rate to about 3.25%. This gradual easing supports a softer GBP tone unless growth and inflation surprise to the upside.
- Growth and inflation outlook: UK GDP expected to slow to about 0.9% in 2026; inflation easing toward 2% by late 2026 due to lower energy costs and softer demand.
- Trade and tariffs: Global trade tensions, including US tariffs, are weighing on UK exports and supply chains; potential GDP impact around 0.7% of GDP if tariffs persist.
- Geopolitics and risk sentiment: Ongoing US-China tensions and regional conflicts keep demand for safe-haven assets elevated, influencing GBP alongside broader risk appetite shifts.
- Domestic data: A jobs report showing falling unemployment but weaker wage growth suggests cooling domestic inflation pressures, which can reinforce a cautious GBP stance.
Range
GBPUSD at 1.3420, 0.8% above its 3-month average of 1.3311, having traded in a very stable 4.0% range from 1.3019 to 1.3543.
GBPUSD to EUR is 1.1493, 0.5% above its 3-month average of 1.1432, with a 2.0% range from 1.1322 to 1.1551.
GBPJPY at 212.6, 2.5% above its 3-month average of 207.5, within a relatively stable 6.8% range from 200.0 to 213.7.
What could change it
- A material shift in BoE policy expectations (earlier or later than the planned two 25bp cuts) or clearer signals on inflation behavior.
- Surprise in UK data (higher wage growth or stronger GDP). Conversely, an unexpected uptick in unemployment or sharper disinflation could weigh on the pound.
- Changes in US tariff policy or a breakthrough in trade talks altering the UK export outlook.
- A shift in global risk appetite or safe-haven demand that reweights USD and other major currencies, influencing GBP broadly.
