– Written by
Frank Davies
STORY LINK Pound to Dollar Year Ahead Forecast: 1.34 at End of 2026, Early 2027
The Pound to Dollar exchange rate (GBP/USD) is back in focus as renewed doubts over US policymaking, Federal Reserve independence and capital flows weigh on the American Dollar, even as banks remain divided on Sterling’s medium-term prospects.
GBP/USD Forecasts: Dollar doubts return
According to HSBC, there is scope for near-term Pound to Dollar (GBP/USD) exchange rate gains; “Short-term, we expect GBP-USD to appreciate modestly driven by broad USD softness, as Fed policy and its independence remain in focus.”
Scotiabank added; “We note the mid-September high in the low 1.37s and the July 2025 high just below 1.38.”
On a medium-term view, Scotiabank forecasts that the Pound to Dollar (GBP/USD) exchange rate will edge higher to 1.37 by the end of 2026 with Sterling and the dollar both vulnerable in global markets.
Geo-political developments dominated during the week with President Trump threatening additional tariffs on eight countries, including the UK, if there was no deal on Greenland.
As risk appetite deteriorated, GBP/USD dipped to 1-month lows near 1.3350 early in the week.
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This threat was later reversed as Trump stated that a deal had been reached. Developments overall encapsulated by tensions between the US and Europe, triggered fresh unease over US policymaking and the dollar lost ground.
The Pound secured a boost from stronger than expected business confidence data with the PMI data strengthening to a 21-month high. In response, GBP/USD surged to 4-month highs as it touched 1.36.
There are very strong expectations that the Federal Reserve will hold rates at 3.75% at this week’s meeting and are pricing in less than a 20% chance of a cut in March.
Markets still expect rate cuts later in the year.
According to ANZ; “As data distortions fade and a clearer picture of disinflation emerges, we believe the FOMC will have sufficient confidence to resume cutting interest rates. We forecast 25bp cuts in March and June, taking the fed funds target range to 3.00–3.25%.”
The risk of capital outflows from US markets has come into renewed focus.
Scotiabank commented; “Foreign investors might consider US foreign policy imprudent but other risks for the USD are manifest and perhaps more relevant—threats to the Fed’s operational autonomy, persistent inflation or a correction in relatively strongly valued US equities could all impact dollar sentiment.”
It added; “Another shift in exposure to the USD already appears to be underway.”
The issue of political pressure will remain crucial with President Trump close to nominating the next Fed Chair while there is likely to be a Supreme Court judgement on whether the Administration can dismiss Governor Cook.
Wells Fargo expects core independence will be maintained and added; “As the Fed’s independence is reinforced over time, capital flows back to the U.S. and the dollar can resume and also be a source of dollar strength starting in H2-2026.”
It expects GBP/USD to trade at 1.34 at the end of 2026.
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TAGS: Pound Dollar Forecasts
