Pound to Dollar Week Ahead Forecast: 1.36 in Sights, 1.45 by Q2 2026

May 26, 2025 - Written by Frank Davies

STORY LINK Pound to Dollar Week Ahead Forecast: 1.36 in Sights, 1.45 by Q2 2026

Morgan Stanley forecasts that the Pound to Dollar exchange rate (GBP/USD) will strengthen to 1.45 by the second quarter of 2026.

Credit Agricole is not expecting GBP/USD to trade above 1.40 and forecasts it at 1.36 at the end of 2026

With the dollar under pressure during the week and the Pound resilient in global markets, GBP/USD surged to 3-year highs around 1.3540.

According to Morgan Stanley the Pound should be “bolstered by its relatively high carry, perceived relative immunization from trade tensions, and indirect benefits from Europe.”

The dollar posted renewed losses for the week with markets fretting for much of the time over the debt outlook following Moodys’ decision to strip the US of its AAA credit rating.

Fiscal fears were intensified by the budget negotiations in Washington.

The House of Representatives passed the Big Beautiful Budget Bill by a 215-214 vote.


The Congressional Budget Office estimates that the House Bill would lift the budget deficit to 7% of GDP in FY2026-2028. It estimated the ten-year cost of the bill USD2.8 trillion or USD4.6 trillion if all temporary tax cuts are made permanent.

The Bill will now pass to the Senate in June.

There was a spike in bond yields which increased market fears.

MUFG commented; “While the downgrade should have limited impact in forcing investors to adjust exposure to US Treasuries, it provides another timely reminder of the deteriorating US fiscal outlook which remains a structural headwind for the USD.”

RBC was sceptical that underlying debt fears have increased; “have we really learned anything new on the deficit front the last few weeks, or is this theme simply rising to the forefront due to the absence left by trade fears dying down?

The dollar posted further losses on Friday after President Trump recommended that 50% tariffs should be imposed on EU exports to the US.

The move triggered fresh anxiety over trade wars and the dollar notably again failed to secure defensive support.


The frequent policy U-turns also triggered fresh unease over the outlook.

According to UBS; “Erratic policy decisions across a range of areas have added a risk premium into the US economy. Policy decisions can be quickly reversed, and there are fewer signposts for what decisions will be.”

It added; “The fact that policy decisions have been made quickly, by people who do not always have prior government experience, has introduced unintended consequences—either forcing policy reversals or causing economic disruption.”

There were also fears over an underlying retreat from US assets.

Credit Agricole commented; “FX investors could continue to view any further US stock market weakness or higher UST yields as indications of intensifying investor outflows and thus as a reason to sell the USD.”

Credit Agricole did put the risks into perspective; “The above being said, we think it is premature to assume that the US is heading to its own ‘Truss’ moment – a reference to the disastrous reign of the UK Prime Minister Liz Truss who presided over a gilt market meltdown in 2022 – that could see its long-term borrowing costs escalating and thus forcing the Fed to adopt measures to contain the FI market selloff.

SocGen does see clear dollar vulnerability; “if global investors, who are heavily overweight on US dollar assets, are offered more attractive yields elsewhere than they have been accustomed to, the threat to the dollar becomes clear.”

There could, however, be a sting in the tail for the Pound.

SocGen added; “In extremis, if a tariff war results in global competition to attract the world’s savings to finance government spending, then international deficit nations (the US and the UK, in particular) will be vulnerable, and global growth will suffer.”

Domestically, the UK headline inflation rate jumped to 3.5% from 2.6% previously as retail energy prices sharply with the core rate increasing to 3.8% from 3.4%.

Following the data, markets priced out the potential for a June Bank of England rate cut and there were doubts over an August move.

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TAGS: Currency Predictions Pound Dollar Forecasts