Pound Sterling Setback into 2026

Modified: Friday, 2 January 2026 10:46 BST - Written by David Woodsmith

STORY LINK Pound Sterling Setback into 2026

The Pound to US Dollar exchange rate (GBP/USD) briefly hit 1.3530 on Tuesday and very close to 3-month highs, but failed to hold the gains and retreated to 1.3470 in thin New York trading and retreated further to 1.3430 on Wednesday in very thin trading ahead of the new-year holiday.

Position adjustment will dominate in the very short term with GBP/USD still set for a gain of around 7.5% for 2025.

Domestically, there are no major data releases during the first half of January, with Federal Reserve developments likely to dominate the dollar and GBP/USD moves.

The dollar index edged higher to 98.35, recovering from lows below 97.75 on December 24th.

The dollar tends to be vulnerable around the late-December period on seasonal grounds and position adjustment, but then tends to recover in January.

According to Bank of America, there has been a significant technical development; “A golden cross signal occurred on December 19th. This is when the 50d SMA crosses above the 200d. In the past, this has tended to be a bullish signal that can favour buying year-end weakness for Q1 upside provided the 50d SMA does not cross back below the 200d.”

It added; “Even when the 200d SMA was declining a bullish bias prevailed.”

Fed policy will remain a key element with 2026 set to be a pivotal year for the central bank, especially with growing divisions.

Minutes from the December Federal Reserve meeting stated that some of members supporting a cut considered the decision finely balanced and could have backed no change.

Most participants still judged that further rate cuts would likely be appropriate if inflation declined over time as expected.

At this stage, markets are pricing in less than a 20% chance of a further rate cut at the January meeting while the chances of a move in March are seen at just over 50%.

Goldman Sachs strategists said the dollar probably will weaken next year against the backdrop of solid global growth, and rate cuts from the Fed with other central banks standing pat.

Overall, the bank expects a relatively limited dollar retreat, although it added; "greater concern around a labour market recession, deeper cuts or a sharp derating in U.S. tech exceptionalism could see a larger move lower.”

There are still important uncertainties surrounding Fed personnel and wider policy stance.

President Trump renewed his attacks on Chair Powell this week with another personal attack and warning that he could still fire him.

There will be wider expectations of political pressure on the central bank to cut rates more aggressively. The announcement of the next Fed Chair will also be a key development early in 2026 with the nominee likely to take office in May.

The Supreme Court is also due to make a ruling on whether Trump’s move to dismiss Governor Cook was legal.

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TAGS: Pound Sterling Forecasts