As 2025 comes to a close, the one word that stands out is tariffs. Tariffs have driven this year’s markets – the unpredictable nature of Donald Trump’s trade policies has damaged the Dollar and allowed other currencies room to breathe. President Trump has been the main character who has dictated many markets worldwide, and looking ahead to 2026 this is most likely to continue.
While the Pound closed 2025 having survived the Autumn budget that seemed to haunt UK markets throughout the latter part of the year, a settled Sterling goes into 2026 above the 1.30 mark, which this report forecasted 12 months ago.
Regarding central banks, the impact of President Trump’s politicisation of the Fed remains uncertain. Markets appear to believe the Federal Reserve has given in to some of that pressure, potentially starting 2026 with the beginning of an easing cycle. The European Central Bank is expected to hold rates, with markets pricing only a small chance of a cut, while the Bank of England remains data-dependent, maintaining a mild easing bias.
USD – Doom And Gloom For The Dollar
President Trump’s unpredictability weighed on the Dollar’s momentum this year, undermining confidence in both the currency and the broader US economic outlook. This was exacerbated by the longest Federal government shutdown in US history, which created a significant backlog of delayed data, leaving markets operating with significantly reduced visibility.
Against this backdrop, the Dollar enters 2026 on the back foot. A December rate cut has already shifted the policy narrative toward rate cuts in 2026. Trump’s repeated attacks on Fed Chair Jerome Powell, alongside calls for a more compliant replacement, have also heightened fears of a politicised Federal Reserve. If markets begin to price in a Trump-backed appointee and a faster pace of rate cuts, the Dollar’s historical advantage could erode further, keeping it under pressure.
Key Influencing Factors For 2026
Federal Reserve Policy
A key factor for the Dollar in 2026 will be the trajectory of Federal Reserve policy. After spending 2025 installing loyalists around the Federal Open Market Committee, the body tasked with setting monetary policy, the growing influence of Trump allies such as Stephen Miran puts a weaker Dollar nearer the centre of the White House agenda. The administration appears comfortable with depreciation, implying the currency’s slide could persist, echoing periods under Republican presidents such as Nixon and Reagan.
Trump’s Policy
Fears around future tariffs have eased, but the risk never fully disappears. Heading into 2026, renewed tariff escalation remains a live threat that could weigh on the Dollar. Reuters cited JPMorgan as warning that tariffs could produce a stagflationary slowdown and noted the bank retains a bearish USD view, with rate cuts delayed before easing resumes by spring 2026 in its projections. Meanwhile, continued ‘small government’ messaging and a renewed ‘Buy American’ push, especially through procurement rules, remain central features of the policy agenda and a persistent source of uncertainty for markets.
Forecast
The Dollar’s depreciation is likely to extend into 2026, with Federal Reserve policy providing a tailwind as ‘Trump trade’ has gathered pace during his first year back in office. As the Fed is increasingly perceived as more aligned with the administration, markets may price in a more accommodative policy bias, one that would erode the Dollar’s yield support and deepen devaluation pressures. With the USD’s momentum already de-accelerating, the setup points to a more volatile and turbulent year ahead for USD.
USD/EUR: 2025 saw historic gains for the Euro, with this currency pairing down over 12% this. This theme will likely continue as the EUR/USD will surpass the 1.20 mark in 2026 and settle above with highs over the 1.24 mark.
GBP/USD: Cable, like the Euro, has made gains against the Dollar with around a 7% year to date increase in December 2025, with Dollar weakness persistent, it’s more of the case of Dollar being weak rather than strength of the Pound. This theme likely continues with Cable pushing the 1.40 mark and settling just below.
The Dollar Weakness Is The Euro’s Gain
The Eurozone was a major beneficiary in 2025, gaining over 5% against the Pound and more than 13% against the Dollar, capitalising on Dollar weakness. Despite setbacks from the tariff debacle, which weighed on Eurozone profits, the Euro’s role as a global reserve currency amid scrutiny of the Dollar has been a key driver of its strength, ultimately supporting the currency even in a year of relatively weak economic data.
Key Influencing Factors For 2026
European Central Bank Cutting Cycle Ending
The ECB appears to be easing, with the deposit rate at 2.0% and policy described as being in a ‘good place’. While the Fed is only beginning to ease from higher levels. The shrinking gap between the US and the Eurozone rates limits the Dollar’s advantage without giving the Euro a sustained boost.
Gaining At The Expense Of The US
Even with the Tariffs this year, the Euro showed its resilience, mainly at the expense of the question marks surrounding US exceptionalism. The long shutdown further dampened Q4 output and delayed critical statistical releases. This subsequently reduced market visibility into economic conditions as many investment banks no longer clearly see the US outgrowing the Eurozone, which previously had supported the Dollar. With policy always being volatile, the meticulous approach to the Eurozone spearheaded by Ursula Von Der Leyen will offer investors a safer place to invest.
Forecast
The Euro, after substantial gains in 2025 has a large chance of continuing this strong form, taking advantage of interest rates differences against both the Pound and USD.
EUR/USD: The gains seen in 2025 are likely to continue. After spending much of the year hovering around the 1.20 level, the pair has a strong chance of breaking higher if momentum is sustained. Major investment banks see growing potential in a Eurozone resurgence, with upside targets around 1.24. By year-end, EUR/USD could plausibly settle above the 1.20 mark.
EUR/GB : As previously mentioned, the theme of Euro gains is likely to persist, as the Eurozone strengthens against a UK economy that has had a challenging year. In addition, the potential for the Bank of England to ease rates supports further Euro gains, with EUR/GBP expected to settle above 1.10 and potentially test 1.15.
GBP – Starmer’s Search For Stability
Current Outlook
The UK economy heads into 2026 after a volatile year for Cable, which swung from 15-month lows to nearly a four-year high. Sterling ends the year roughly 6.5% stronger versus the Dollar, yet around 5% weaker against the Euro. That mixed performance reflects an economy weighed down by soft data and a political backdrop that has repeatedly unsettled markets. The Autumn Budget, in particular, fuelled uncertainty, marked by delays and a multitude of leaks that whipped up speculation ahead of the announcement. With the Bank of England remaining data-dependent but carrying a mild easing bias, though markets expect fewer cuts than in the US, the policy mix points to another year of elevated FX volatility rather than a clean, sustained trend.
Key Influencing Factors For 2026
UK Political Volatility
2025 often felt like a political circus in the UK; events like Deputy Prime Minister Angela Rayner’s resignation amid a tax scandal, rumblings of an internal Labour coup, and the budget’s embarrassing leaks all combined to sap confidence. If that pattern persists, renewed questions over government stability could deepen political unease and weigh on sentiment toward Sterling. The positions of both Rachel Reeves and Keir Starmer have been repeatedly scrutinised, and as pressure builds, any optimism sparked by positive data releases may prove fragile. In that environment, renewed volatility in Westminster, along with spillover volatility in gilt markets, looks set to remain a persistent and material headwind for the Pound.
The Dollar’s Weakness Is The Pound’s Gain
As outlined earlier, the Dollar is likely to remain on a devaluation path. In that context, a widening policy divergence between the Fed and the Bank of England could become the dominant driver, outweighing the UK’s political noise and a softening domestic growth backdrop. If US easing proves deeper or faster than the BoE’s, that shift in interest rate differentials could keep GBP/USD supported through the year and leave room for a potentially bullish Cable in 2026.
Forecast
Sterling in 2026 could easily mirror 2025. If the Eurozone gains traction, the Euro may continue to outperform the Pound, while broad Dollar weakness could keep Cable supported and set the stage for a potentially bullish year.
GBP/USD : Cable has climbed roughly 7% year to date by December 2025, reflecting a steadier Pound backdrop as much as softer Dollar dynamics. While US weakness has helped, sterling has also benefited from improved positioning and relatively resilient demand for UK assets. If that support holds into 2026, cable could remain constructive, with scope to press toward the 1.40 area before ultimately settling just below it.
GBP/EUR : Sterling is likely to remain under pressure in 2026 after a challenging year for the UK economy. Softer data and a Bank of England potentially leaning toward rate cuts could limit the Pound’s upside against the Euro. In this environment, EUR/GBP could stay above 1.10 and potentially test 1.15 during periods of stronger Eurozone momentum or renewed UK uncertainty.
