Overview of the Pound’s Performance
The pound has had a mixed year, with a strong performance against the US dollar, but a weaker performance against the euro. Despite sinking to a low of 1.2100 in January, the pound experienced a significant move to 1.3800 in the first half of the year. However, since those July peaks, the pound has seen a modest pullback, with support coming in at the 1.3000 level in October, before a recovery to current levels.
Performance Against the Euro
Against the euro, the pound has struggled, sliding from peaks of 0.8240 at the end of February, and undergoing gradual losses on a month-to-month basis, sliding to the 0.8865 area mid-November, before a modest rebound. The poor performance of both the US dollar and the Japanese yen have offered the pound some modest relief, with the weak yen a symptom of interest rate differentials, as well as limited expectations about future rate cuts.
Factors Affecting the Pound’s Performance
The flight from the US dollar appears to be a mechanical reaction to investors diversifying away from the greenback amidst uncertainty over the effects of US government fiscal, as well as trade policy. The performance of the euro has also been reflected in the strong gains that we’ve seen across European equity markets with capital flowing out of the US as investors diversify away from US equities, to cheaper European markets.
GBP Performance YTD 2025
The pound has been trending lower against the US dollar since the summer. We did find some support at the 1.3000 area in mid-October which has since prompted a rebound but we would need to see a strong move through 1.3600 to suggest the recent weakness has run its course. This barrier is located through the upper trend line from the July peaks which could have the potential to signal a move towards 1.4000.
EUR/GBP Performance Year to Date 2025
Against the euro, the picture is more mixed with the pound caught in a steady decline that shows little sign of running out of steam, with current strength likely to be limited to a move towards the 0.8620 area. The main question we had heading into this year was based around how many more rate cuts were likely to come down the line, and whether any central bank might start to lean towards raising rates.
Interest Rate Expectations
With the exception of the Bank of Japan, we don’t, as yet, have any central banks leaning towards rate hikes, although we also haven’t had nearly as many rate cuts as we thought we would during 2025. The ECB called a halt to rate cuts in the summer, while splits at the Bank of England and the Federal Reserve have complicated the picture when it comes to the size and speed of further rate reductions this year.
Economic Outlook for 2026
The primary worry is that inflation may not come down as quickly as the government or the Bank of England would like, resulting in the MPC keeping rates higher for longer. The reasons for this stickiness are easy to spot and lie in Westminster, where a mind-numbingly economically illiterate approach to the nation’s finances from the government, has prompted an even larger moron premium on UK gilts, as well as a failure to learn the lessons of the October 2024 budget.
Conclusion
In conclusion, the pound is likely to continue its trend of weakening against the euro, potentially heading through the 0.9000 area, while continuing to hold its own against the US dollar, albeit with a downward bias. The central bank will not only need to keep its focus on prices, but will also have to contend with a slowing economy at a time when wage inflation could stay sticky for longer. As for the Fed, the market is pricing for one more cut between now and the middle of next year, while the ECB appears to be done.
