Morgan Stanley presents the most bullish scenario, projecting GBP/USD at 1.47 by end-2026, with upside extensions toward 1.50 if US growth decelerates sharply. Their base case assumes three additional Fed cuts in the first half of 2026, driving the fed funds rate toward 3.00% and compressing US rate differentials. Still, even Morgan Stanley has moderated its earlier conviction, acknowledging that dollar weakness may prove more measured and front-loaded.
MUFG adopts a middle-ground approach, projecting GBP/USD near 1.40 by mid-2026, consistent with a gradual rather than disorderly dollar decline. Importantly, MUFG has revised forecasts higher for the dollar relative to earlier expectations, reflecting its resilience despite easing.
Bank of England: Sterling’s Limiting Factor
If the Fed sets the ceiling for GBP/USD, the Bank of England likely defines the floor. After cutting rates five times in 2025, bringing Bank Rate to 4.00%, markets expect further easing. Consensus forecasts see rates falling to 3.25% by Q3 2026, with several institutions calling for 3.00% or lower by year-end.
The rationale is straightforward. UK growth remains weak, GDP contracted in October 2025, and unemployment has risen to 5.0%. At the same time, inflation remains elevated at 3.6%, leaving the BoE balancing fragile growth against incomplete disinflation. Morgan Stanley expects rates as low as 2.75%, a move that would materially erode Sterling’s carry support.
This aggressive easing bias limits Sterling’s ability to outperform, even in a weakening dollar environment. Unlike earlier cycles, GBP’s upside is unlikely to be driven by yield differentials and instead relies on relative economic resilience and capital flows.
Risk Scenarios: What Moves the Needle
Upside risks for GBP/USD are overwhelmingly dollar-centric. A sharper-than-expected US slowdown could force the Fed into faster or deeper cuts, pushing GBP/USD toward the upper end of forecasts. Similarly, a policy misstep that tightens financial conditions into labor market weakness would likely weigh on the dollar.
Sterling-specific upside is harder to justify but not impossible. A stabilization in UK growth, improved productivity trends, or credible fiscal signaling could help GBP outperform expectations, though these remain secondary drivers.
Downside risks remain meaningful. Sticky US inflation could stall Fed easing and preserve dollar yield support. In the UK, fiscal scrutiny is likely to intensify ahead of future budget cycles, particularly if debt dynamics worsen. A global risk-off episode would also favor the dollar, regardless of valuation arguments.
Technical and Positioning Context
From a technical standpoint, GBP/USD faces heavy resistance in the 1.38–1.42 zone, an area that capped rallies in prior cycles. Support near 1.30–1.32 has held consistently, suggesting a broad trading range rather than a trending market.
Positioning remains elevated following Sterling’s 2025 performance, increasing vulnerability to pullbacks if underlying momentum fades. Sustained breaks above 1.38 would likely require either pronounced US weakness or a material improvement in UK fundamentals, neither of which sits in the consensus base case.
