• The GBP/USD forecast remains bullish moving into 2026 as the Fed-BoE divergence widens in favor of the pound.
• Political risk and the Fed’s dovishness continue to weigh on the greenback.
• Cautious BoE and sticky UK inflation keep the yearly forecast for GBP/USD higher.

The GBP/USD pair starts the New Year with a firm footing, moving to the 1.3490 area as the US dollar remains broadly weaker, reflecting the widening divergence between the Fed and the Bank of England.

The US dollar closed 2025 with the sharpest annual decline in eight years, reinforced by continued Fed easing in 2026, which included two more rate cuts.

Markets are already anticipating a 15% probability of a January rate cut, despite FOMC minutes revealing no haste unless inflation shows obvious signs of cooling. The softer NFP report in December, adding 95k jobs against the expected 150k, has further reinforced the view that labor markets are losing momentum, pressuring the Fed to ease soon.

On the other hand, political uncertainty has also contributed to the dollar’s weakness, as President Trump openly expressed his preference for a dovish successor to Fed Chair, potentially replacing Powell in May. The remarks have raised questions over the Fed’s autonomy, inducing further risk premium into the dollar.

By contrast, the Bank of England maintains a cautious policy. The central bank reduced rates by 25 bps in December to 3.75%, the lowest level in three years, while Governor Bailey emphasized that further easing is likely. However, UK inflation remains sticky at around 3.1%, compared to the US Core PCE at 2.8%, giving the BoE less urgency to ease rates. The policy divergence provides a floor under sterling despite the BoE’s expected gradual easing through 2026.

Positioning dynamics also support the pound, as continued short-covering remains evident in the currency following the reduction of UK fiscal uncertainty. Consequently, the pair remains comfortably above the mid-1.3400 level. However, the upside is primarily driven by the dollar weakness rather than domestic strength.

Looking ahead, major banks anticipate the pair to stay in a broad range of 1.35 – 1.47 in 2026, with forecasts clustered within 1.36-1.40. Although the first half of 2026 appears constructive for the pound, conviction remains limited amid the UK’s weaker growth, rising unemployment, and BoE rate cuts expected later this year.
 

GBP/USD Technical Forecast: Bullish Pin Bar
 

(Click on image to enlarge)

GBP/USD 4-hour chart
 

The GBP/USD found a strong support at the 100-period MA near 1.3400 in the last trading session, forming a bullish pin bar, which points to the beginning of a fresh bullish impulsive wave. Though the price remains capped by the 50-period and 20-period MAs, with flat RSI near the 50.0 mark, the pair remains in good shape to test the December swing highs of 1.3530.

On the other hand, failing to break the 20-period MA at 1.3482, the pair could gather selling momentum, leading to a decline to 1.3450, followed by 1.3400. Meanwhile, a breakout below the low of the bullish pin bar could indicate a bearish reversal.

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