So, with all of that being said, it’s probably not surprising that it was one of the better performers on the way back up. The Federal Reserve transitioned from a tightening monetary policy to a patient, data-dependent stance. That was the first sign that maybe things were changing just a bit. They went from being overly hawkish to somewhat ambivalent and cautious. That being said, the markets multiple times during the year mispriced the dollar, not just against the British pound, expecting massive interest rate cuts and a return to super-easy money.
You also have to keep in mind that the Bank of England maintained a relatively hawkish stance early in the year, driven by sticky inflation, especially in the services sector of the United Kingdom. It did eventually soften a bit as growth concerns and sensitivity in the housing market became apparent. That is basically what started to happen right around the beginning of July, when the British pound started to show cracks in its strength.
Growth Divergence and Rate Differentials
The rate differential is pretty narrow, but it overall supports the US dollar. It just kind of depends on what the bond markets are doing at any given moment. The economic performance in the United States has been better than expected. While much of the year was spent plotting the death of the US economy, it turns out people in America still spend. It looks like a boom town in many places, with consumers continuing to buy. Whether that is on credit or cash is a different story, but it does provide growth.
The labor market in the United States is still really strong. It is not hard to find a job at all, and in fact, there is a shortage of workers, which is a good problem to have. The United Kingdom avoided a significant recession, but it did remain somewhat fragile. That fragility helped drive the pound lower. Mortgage resets weighed on consumption in the UK, unlike the United States, where fixed-rate mortgages insulate households from rate changes.
The British pound traded with more volatility than the euro and initially benefited from the hawkishness of the Bank of England. That being said, rallies often stalled during the year due to growth uncertainty and UK fiscal credibility concerns. Global sentiment was in flux at times, which often favored the US dollar regardless of UK-specific factors.
The British released a budget that was received positively, helping form a double bottom around the 1.30 level. That provided some support later in the year. However, the current technical structure shows a lot of uncertainty. The long-term trend going into 2026 appears sideways but mildly bearish. Momentum swings are short but violent, and despite the bullish start to 2025, the market spent a lot of time moving sideways.
