The pound hit a two-month high against the euro and the strengthening momentum is expected to continue

The Zhitong Finance App learned that on Tuesday, the pound hit the highest level in two months against the euro, and the exchange rate against the US dollar remained stable despite light holiday trading, even though there was not much news on that day that was enough to significantly impact the trend of the pound. The trend of GBP/EUR was slightly active. At one point, it rose to 87.03 pence per euro, the biggest increase since mid-October, but the increase on the day was still only slightly above 0.1%. The GBP/USD exchange rate was flat at 1.3518, slightly below the three-month high set last week.

Trading was light during the Christmas holidays in the UK, and the same was true on the eve of the New Year holidays. Therefore, the trend of the pound is still mainly affected by the Bank of England meeting in early December. The Bank of England cut interest rates after policymakers voted for it by a narrow margin, but it also suggests that the already slow pace of interest rate cuts may slow further. If this expectation comes true, the pound will continue to be strong against other currencies (especially the US dollar), as the market expects the Federal Reserve to continue to ease monetary policy next year.

The predictions of major Wall Street investment banks on the trend of the British pound exchange rate in 2026 show a cautious and optimistic consensus: most institutions expect the pound to strengthen or at least remain stable against the US dollar. The core logic is that the US dollar is generally bearish. Investment banks represented by Morgan Stanley, UBS, and RBC are clearly bullish, predicting that GBP/USD is expected to reach the 1.43 to 1.51 range in 2026, and even hit the highest point since the 2016 Brexit referendum. These optimistic expectations are mainly based on the fact that the Fed's continued interest rate cut cycle will weaken the dollar's interest rate spread advantage, while the Bank of England is expected to cut interest rates more slowly and prudently, thereby making the pound more attractive. Despite concerns about the UK's domestic financial situation, some investment banks believe that the market is overreacting, providing an opportunity to buy on dips.

However, the market is not one-size-fits-all. Goldman Sachs and other institutions have a neutral attitude, believing that the upward momentum of the pound may stagnate around 1.35-1.36. Goldman Sachs analysts pointed out in a report on Tuesday that as the UK labor market weakens, they expect the overall UK inflation rate to decline further in the next few months. They said, “Therefore, we expect the Bank of England to cut interest rates three times in 2026, and the final interest rate will drop to 3%, which is lower than the current pricing level.”

Second, Wells Fargo has a bearish view and predicts that the US dollar will rebound sharply and the pound will weaken to around 1.31. This indicates that the market is still divided and uncertain about future exchange rate trends. The overall outlook indicates that the performance of the pound in 2026 will be highly dependent on the global macroeconomic environment, in particular the Federal Reserve's actual interest rate cut path, the stability of the UK's domestic economy, and the risk of a potential global recession. Despite these variables, mainstream Wall Street sentiment favors a positive year for the pound.