2026 GBP Outlook: The Exchange Rate Puzzle Amid Institutional Divergence

The recent trend in the GBP exchange rate has attracted market attention. Since the beginning of the new year, GBP/USD has broken through 1.3562, reaching a six-month high. Over the past two months, the pound has appreciated by a total of 4.12%, far exceeding the 2.22% gain of the euro against the dollar. What market logic is behind this rebound? And forecasts for the GBP’s performance in 2026 have become a focal point for major investment banks, though institutional opinions are increasingly divided.

Three Major Factors Driving the Recent GBP Breakthrough

The continued rise of GBP/USD is mainly due to three combined factors. First, in November 2025, the UK announced a better-than-expected budget plan, which led investors to reduce their short positions on the pound, restoring market confidence. Second, in December, the Bank of England adopted a relatively hawkish rate cut decision, implying that the pace of future rate cuts may slow further, supporting the pound’s performance. Third, the dollar has softened amid uncertain global economic prospects, creating a relatively favorable upward space for the GBP.

How Central Bank Policies and Yield Advantages Influence GBP Trends

From a policy perspective, the market currently expects the Federal Reserve to cut rates twice in 2026, while the Bank of England is expected to cut only once. This differentiated policy outlook gives the GBP a higher yield advantage compared to the dollar, attracting carry trade investors. The yield advantage itself is an important factor supporting the exchange rate, so the relative strength of the pound during this period is not accidental.

2026 GBP Exchange Rate: Divergent Predictions from Three Major Investment Banks

Despite the recent strong performance of the pound, major banks hold differing views on its trend throughout 2026.

J.P. Morgan believes the GBP faces a dual challenge. On one hand, the resilience of the UK economy and the attractiveness of carry trades will continue to support the pound; on the other hand, twin deficits and political risks remain persistent clouds. The bank forecasts a “rise then fall” trend for GBP/USD, with specific targets: 1.37 in Q1 2026, rising to 1.41 in Q2, pulling back to 1.40 in Q3, and further declining to 1.36 in Q4.

Bank of America adopts a relatively optimistic stance. It believes that after the UK’s fiscal budget is implemented, the policy uncertainty that previously clouded the market will begin to dissipate, and the fiscal risk premium will diminish accordingly. Meanwhile, the market has already priced in the Bank of England’s rate cut expectations, leaving room for further upside. BofA projects GBP/USD will continue to rise in 2026, with a year-end target of 1.45.

Citi offers the most pessimistic forecast. The bank points out that the upcoming local elections in May could intensify political uncertainty in the UK. In the second half of the year, the Bank of England may accelerate its easing cycle, which would exert significant downward pressure on the pound. Citi expects GBP/USD to fall to 1.22 in 2026, a stark contrast to BofA’s 1.45 target.

How Political Risks and Easing Cycles Reshape the GBP Outlook

The key divergence in GBP’s outlook ultimately hinges on judgments about political risks and the central bank’s easing cycle. If the UK maintains political stability and the central bank remains cautious, the pound is likely to benefit from its relative yield advantage and continue to appreciate. Conversely, if political uncertainty increases and the BOE accelerates easing, the GBP will face significant downward pressure. Currently, institutional opinions vary widely on the GBP’s 2026 trajectory, and investors should approach this complex exchange rate environment with caution.