Sterling could see downside risk in 2026
|Sterling was little changed against its peers over the Christmas holidays, as few notable data was released and no major monetary policy decisions or speeches occurred. Markets are pricing in little more than one additional cut by the Bank of England in 2026.
This means that the pound should retain substantial support from a wide interest rate differential over the euro, at least until the European Central Bank starts looking at hiking rates, which admittedly could happen prior to the MPC.
We remain cautious on sterling this year, however, given the amalgam of downside risks to the economic outlook, and we foresee a continuation of only modest economic growth that we saw in 2025.
This should be enough for sterling to keep up with the euro as European currencies generally continue to drift higher against the US dollar.
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