Pound Sterling’s yield advantage may struggle to offset tighter UK fiscal policy, leaving SocGen forecasting a GBP/USD retreat towards 1.33 in early 2027.
The British Pound to Dollar (GBP/USD) exchange rate slipped on Thursday, with Societe Generale forecasting further losses as tighter UK fiscal policy limits Sterling’s interest-rate support.
At the time of writing, GBP/USD was trading around 1.3524, down 0.18% against the previous close after recovering from an intraday low near 1.3494.
Currency analysts at SocGen expect GBP/USD to finish 2026 at 1.34 before falling to 1.33 in the first quarter of 2027, roughly 1.7% below current levels.
Its exchange rate forecasts then return to 1.34 for both the second and third quarters, leaving little prospect of sustained appreciation over the coming year.
High yields support Pound Sterling, but the advantage has limits
SocGen argues that interest-rate differences explain much of the Pound’s relative resilience against other European currencies.
“The pound’s position, below the NOK in Europe but above the SEK, CHF, and EUR, simply reflects the level of interest rates.”
The bank expects tighter fiscal policy to restrain demand and make further rate increases less likely, weakening the case for buying Sterling to earn a higher yield.
That creates a complication for investors who welcomed the Chancellor’s recent commitment to fiscal discipline.
We believe credible budget measures could reassure gilt investors while also reducing the interest-rate expectations that have supported the Pound.
The latest official public-finance figures illustrate the pressure: borrowing reached £56.7 billion in the financial year to July, £6 billion below a year earlier but £2.3 billion above the OBR forecast.
A softer Dollar may offer only limited relief
SocGen’s caution on Sterling persists even though it expects the Dollar to weaken in 2027 after modest strength through the remainder of this year.
For the nearer term, the bank expects Federal Reserve tightening.
“However, we expect a series of Fed rate hikes to start in the weeks ahead,” SocGen says.
That would make it harder for Sterling to extend gains if UK fiscal restraint simultaneously reduces the likelihood of higher domestic rates.
A stronger-than-expected UK economy or a sharper Dollar decline could challenge the 1.33 forecast.
SocGen’s own projections nevertheless leave GBP/USD at just 1.34 by the third quarter of 2027, below today’s level even after the anticipated Dollar weakness.
Our currency coverage draws on live market data, official economic releases and published bank research.
