Pound to Dollar Forecast: Sterling Gains but BoE, Fed Divergence Looms

Modified: Monday, 20 July 2026 07:01 BST - Written by Ben Hughes

STORY LINK Pound to Dollar Forecast: Sterling Gains but BoE, Fed Divergence Looms

The Pound to Dollar exchange rate (GBP/USD) has entered a new political era after surging to two-month highs above 1.3550 before easing back towards 1.3450.

With Andy Burnham set to become Prime Minister on July 20th, markets are closely watching Cabinet appointments, particularly the choice of Chancellor, as investors assess whether the new government can sustain the recent improvement in Sterling sentiment.

GBP/USD Forecasts: Pound in a new political era

HSBC forecasts a GBP/USD retreat to 1.27 by the middle of 2027 amid net dollar gains.

ING, however, expects GBP/USD support above 1.30 with an end-2026 forecast of 1.34 as the dollar loses ground.

GBP/USD jumped to 2-month highs just above 1.3550 during the week before a retreat to just below 1.3450. Geo-political developments did not have a major FX impact despite notable gains in oil prices as the US and Iran traded attacks in the Gulf.

Political developments will remain under scrutiny with Burnham taking over as Prime Minister on July 20th. The immediate focus will be on Cabinet appointments with the position of Chancellor particularly sensitive for markets.

Given that the Pound rallied on reports that Mahmood will be appointed, there will be the risk of a retreat if this is not confirmed. Burnham’s initial comments on economic policy will also be watched very closely.

UBS maintains an optimistic stance; "UK political developments have shifted from a headwind to a tailwind, with an orderly leadership transition and expectations of a fiscally prudent chancellor boosting market confidence.”

Monetary policy will be a key fundamental FX driver over the next few months.

According to ING; “Markets continue to price 40-45bp tightening cycles for both the Fed and the Bank of England over the next six to nine months. Our call is that neither of them will deliver on those hikes, which means that GBP/USD can probably continue trading in the middle of its 1.32-1.36 range.

It did add on the near-term outlook; “If anything, we see greater downside risks in the near term, with the Fed likely to remain hawkish for another month or two.”

Danske commented on the UK economy; “The economy is slowing with PMIs in June still painting a rather bleak picture of the economy.”

Danske is not expecting the Bank of England to raise rates this year. In contrast, the bank expects two hikes by the Federal Reserve.

HSBC expects limited net dollar gains; “Anticipating the broad USD's next moves is a constant grind, but breaking the drivers down, it should have the upper hand. We see it grinding higher while the ingredients for a sharper rally are missing, in particular the absence of a rapid Fed hiking cycle.”

HSBC is also wary of changing its Pound outlook; “We see a potential upside tail risk if a new PM shifts the focus from fiscal constraint to unlocking private-sector animal spirits. We think the UK's twin deficits don't tell the whole story as healthier private-sector finances could be a more constructive offset. Even so, our base case remains for a weaker GBP.”

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TAGS: Pound Dollar Forecasts