Pound Sterling Year-Ahead Forecast: JPMorgan Lifts GBP Forecasts for 2026

The British pound strengthened against both the dollar and the euro this week as political uncertainty in the UK continued to ease, according to forex market analysis. EUR/GBP slipped to around 0.8550, its lowest level in months, while GBP/USD held above 1.3350. JPMorgan raised its sterling forecasts for 2026, citing reduced risk after reassuring remarks from Labour's Andy Burnham, the bank said in a research note.

Traders said the move reflected a decline in the political risk premium that had weighed on the pound since the general election. Burnham's comments on fiscal discipline and economic stability helped narrow the yield gap between UK gilts and German bunds, they added. That made sterling more attractive on a carry basis, particularly against the euro. The carry trade, where investors borrow in low-yielding currencies to buy higher-yielding ones, has been a key driver of EUR/GBP flows this year.

The decline in political risk has also boosted UK equities and narrowed credit spreads, traders said. That has attracted foreign capital inflows, supporting the pound. The correlation between sterling and UK gilt yields has strengthened, with the currency now more sensitive to BoE policy expectations than to political headlines.

For EUR/GBP, the break below 0.8600 opened a path toward 0.8500. The euro has struggled. Eurozone growth data disappointed, while UK services PMIs held up. JPMorgan's revised forecasts assume this growth divergence persists through 2026, the note said. The bank now sees EUR/GBP trading lower over the next 12 months, though it did not disclose a specific target. The euro's decline against the pound is also a story of eurozone weakness. Eurozone growth has stagnated, and the ECB has signalled further rate cuts. The BoE has maintained a cautious stance. That divergence in monetary policy paths has been a factor supporting EUR/GBP downside.

On GBP/USD, the pair has held above 1.3350. The dollar found support from higher US Treasury yields. The pound's resilience suggests the market is pricing in a slower pace of Bank of England rate cuts relative to the Federal Reserve, analysts said. JPMorgan now expects GBP/USD to trade higher into year-end, though the bank did not specify a new target in the note. The dollar has been supported by strong US data. The pound's ability to hold gains points to a shift in relative rate expectations.

The pound's rally has also weighed on the dollar index. The DXY slipped alongside GBP/USD's rise. A stronger sterling reduces the dollar's weight in the DXY, adding to the greenback's broader weakness. For emerging market currencies, a stronger sterling often correlates with improved risk appetite. The effect has been muted this week.

The next major test for sterling will be the Bank of England's November policy meeting, where the Monetary Policy Committee will release new growth and inflation forecasts. Analysts said the bullish case for sterling depends on continued political stability and a BoE that cuts rates more slowly than the ECB or Fed. Any reversal in Burnham's stance or a surprise dovish tilt from the BoE could unwind the gains, they added.

For now, EUR/GBP at 0.8550 and GBP/USD above 1.3350 reflect the market's new positioning after JPMorgan's upgrade. EUR/GBP traded at 0.8550 late Friday, while GBP/USD held at 1.3360.