– Written by
Ben Hughes
STORY LINK Pound to Dollar Forecast: GBP/USD Rises but Credibility Questions Linger
The Pound to Dollar exchange rate (GBP/USD) edged up toward 1.3250 as the Sterling avoided post-budget downside and the dollar remained under pressure.
Analysts see room for near-term relief, though concerns over back-loaded tax hikes and long-term fiscal credibility remain unresolved.
Fed policy expectations now dominate the outlook, with markets increasingly pricing a more dovish stance into 2026.
GBP/USD Forecasts: Budget relief?
Bank of America forecasts that the Pound to Dollar (GBP/USD) exchange rate will strengthen to 1.45 by the end of 2026 as the Pound secured a net gain and the dollar loses ground.
Wells Fargo, however, forecasts that GBP/USD will retreat to 1.30 at the end of next year amid Pound losses and a dollar rebound.
GBP/USD secured a net gain to near 1.3250 during the week as the dollar faltered and the Pound avoided any downside from the budget.
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Chancellor Reeves announce tax increases of £26bn in the budget and forecasts net headroom compared with the fiscal rules of just over £20bn.
Spending, especially on Welfare was increased, mainly through scrapping the 2-child benefit cap for Universal credit while tax increases mainly come into effect from 2028 and the near-term borrowing requirement will increase.
According to BoA, there will be net relief; “the budget has the buy-in from the OBR while the Chancellor has reinforced the commitment to keep the fiscal rule and fiscal headroom.
It added; “These are important anchors which should lead to a relief rally in GBP as the release valve of event risk has passed.”
The bank also considers that the adjustment in UK rates is potentially at an end which will lessen the risk of further selling.
According to ING; “The positives came in the form of higher fiscal headroom (less pressure on fiscal credibility) plus the fact that the UK government did not need to raise taxes as much as expected next year.”
Nevertheless, it added; “Concerns over the credibility of back-loaded tax hikes may have to be left to another day. And we do not think the government’s spending plans, running into a 2029 election, look credible.”
Federal Reserve policy is likely to be crucial for the dollar.
Bank of America expects the dollar will lose ground; “Even if this current easing pace is moderated during Powell’s last few meetings as Chair, we believe the next Fed Chair will bring a more dovish shift in policy and potentially greater concerns over the Fed’s independence overall.
It added; “Should the Fed push rates even lower in the face of sticky inflation the dollar should suffer both via lower real rates as well as increasing risk premium.”
NatWest expects Fed policy will hurt the dollar; “We forecast rapid-fire rate cuts to a 2.75-3.0% range by mid-year.”
It noted; “it is far from clear that underlying US macroeconomic conditions, a still ultra-expansionary fiscal policy stance and equity market valuations warrant this degree of monetary loosening.”
It expects GBP/USD gains to 1.42 at the end of 2026.
Wells Fargo sees scope for near-term dollar losses, but expects a recovery later in the year.
According to the bank; “A monetary policy divergence theme should build in early 2026 that weighs on the dollar; however, once Fed easing ends, the dollar can rebound and discussions about the greenback losing its reserve FX status should diminish.”
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TAGS: Pound Dollar Forecasts
