Modified: Tuesday, 26 May 2026 08:06 BST

– Written by


James Fuller

STORY LINK Pound to Dollar Week Ahead Forecast: Fed Expectations and UK Risks Weigh on GBP

The Pound to Dollar exchange rate (GBP/USD) remained under pressure as investors favoured the US Dollar amid resilient American economic data, elevated Treasury yields and fading expectations for Federal Reserve interest-rate cuts. With UK political uncertainty and questions over the Bank of England’s next move lingering in the background, Sterling faces a challenging near-term environment despite pockets of resilience.

GBP/USD Forecasts: Dollar dominates

Danske Bank forecasts that the Pound to Dollar (GBP/USD) exchange rate will slide to 1.26 on a 12-month view as the dollar makes net gains and the Pound remains fragile.

CIBC, in contrast, sees scope for limited GBP/USD gains to 1.37 by the end of this year.

Danske Bank has changed its dollar view; “In May, the underlying macro momentum has started to increasingly favour the US. High-frequency labour market data has improved, and underlying inflation seems to accelerate beyond the first-order energy effects. Significant AI-related investment demand is lifting both real growth and imported inflation in the US.”

CIBC remains less confident over the dollar; “The near term risk for the USD in our view, is that lagged impact of the shock begins to weigh on the growth data, which could lead to a further tactical USD bid. It is in the second half of the year, when we expect the USD to resume a trend weakening.”

Bank of England (BoE) policy will be a key element. Difficulties faced by the BoE was illustrated by the latest PMI business confidence data.

There was the weakest reading for services-sector index for five years, but strong upward pressure on costs continued with output charges increasing at the fastest rate for four years.

Headline inflation dipped to 2.8% from 3.3%, but the rate will increase again over the next few months while labour-market data was weak.

BoE members at the Treasury Select Committee pointed to a high degree of uncertainty, but with some reluctance to make a quick decision.

CIBC discussed the BoE outlook; “Tightening financial conditions and or a central bank which is already moderately restrictive leaves us anticipating a less aggressive reaction function than that discounted by the market, namely 2026 inertia. Given the importance of policy to consumer sentiment and spending such an outcome should prove supportive for activity and by definition eventually the currency.”

Danske Bank is not backing the market view; “With neither wage data nor food prices indicating any concern on spillover effects, the BoE can afford to wait for more data. We think they are satisfied with the tighter financial conditions and are most likely to keep the Bank Rate at the current level throughout 2026 and 2027.”

UK political developments will also be watched closely.

ING commented; “The Labour Party looks like it wants a new leader, but PM Starmer is vowing to fight on. This psychodrama could take two to three months to unfold if Andy Burnham – seen as the most negative sterling candidate – enters the race to replace Starmer.”

The bank added; “Status quo looks the best outcome for GBP if Starmer stays, or Wes Streeting is elected with a sensible Chancellor. Most other options are GBP negative as Labour policy is pulled leftwards.”

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TAGS: Pound Dollar Forecasts