ExchangeRates.org.uk – The Pound Sterling faces a gloomy 2026 outlook as UK inflation trends toward 2 percent, growth slows and the labour market weakens, all of which point to further Bank of England rate cuts and pressure on the currency.Latest — Exchange Rates:
Pound to Euro (GBP/EUR): 1.14483 (+0.07%)
Pound to Dollar (): 1.33394 (-0.06%)
Euro to Dollar (): 1.16519 (-0.12%)
Inflation has likely peaked and could be heading back towards 2% by Q2 next year.Growth is likely to slow, and the labour market is easing.
All these point to more cuts from the BoE and a negative outlook for the pound.
2026 outlooks are being released in the financial media and there are some interesting calls for forex markets.
The consensus seems to be for more US dollar weakness driven by labour market fragility and more rate cuts from the Fed.
This is especially likely now that the dovish Kevin Hasset looks certain to take over as Fed Chair in May.
Outlooks for the UK tend to agree that the pound could come under pressure as slowing growth and tepid inflation lead to more cuts from the BoE.
But sterling bulls should not be too disheartened – markets rarely do what everyone expects.
Inflation, currently running at 3.6%, looks to have peaked several months ago and is set to slide toward roughly 2% by the second quarter of 2026.
Food prices appear to have already hit their high point.
A sharp slowdown in wage increases suggests service-sector inflation will ease, reinforced by milder regulatory price adjustments and a cooling in rental costs.
The government’s move to cut energy charges should shave about 0.3 percentage points from the headline CPI as well.
Some of the Bank of England’s more hawkish members worry that stubbornly high prices in 2025—especially for food—could spark a renewed, 2022-style inflation surge.
That looks unlikely as the labour market is easing and firms no longer have the pricing muscle they once had.
Indeed, slowing growth could lead to a much weaker inflation outlook.
Economic momentum is already relatively slow at 1.4% but is projected to ease to around 0.9% in 2026 for several reasons.
Firstly, household purchasing power is poised to flatten out.
Real disposable incomes are on track to rise by only about 0.5% in 2026, compared with a 1.5% increase this year.
Pay gains are cooling rapidly, employment growth is expected to be minimal, and any benefit from rate cuts will take time to filter through.
In addition, the public sector—which played a major counterbalancing role against private-sector softness in 2025—won’t offer the same lift.
Real departmental budgets are set to expand at only half the pace seen in 2024 and 2025, and income tax is climbing as a share of GDP.
With the fiscal deficit likely to shrink by about one percentage point to around 3.5%, fiscal policy is positioned to weigh on growth in 2026.
Lastly, business investment is expected to soften, at least through the first half of the year.
Confidence has taken a hit amid concerns over forthcoming tax increases, and global headwinds are adding further pressure.
This was all reflected in the Office for Budget Responsibility’s Economic and Fiscal Outlook released in response to the Autumn Budget.
It upgraded 2025 growth but downgraded medium-term productivity, with 1.4% forecast in 2026, down from 1.9%, and 1.5% average from 2027–2030 down 0.3 percentage points from prior forecast.
Overall, real GDP averages 1.5% from 2026–2029, with the end-2030 level flat versus March.
Productivity drives the slowdown, while export markets are up 0.7 percentage points in 2025 but down 0.2 percentage points later due to trade tensions.
None of this is particularly positive for the pound in the long-term as the BoE will almost certainly cut rates to neutral (at least another 3 cuts) and beyond if there is slow growth, tepid inflation and an easing labour market.
This content was originally published on ExchangeRates.org.uk
