Currency 2026: Interest Rates Set Market Tone

Wednesday 07th January 2026 – 11:11 (GMT)

GBP/EUR: Sterling’s Advantage Narrows

Sterling enters 2026 trading at elevated levels against the euro as GBP benefited from higher interest rates throughout 2025. That support is set to fade as the Bank of England’s easing phase gathers pace.

While the UK economy has held up better than much of the eurozone, markets are increasingly focused on whether looser UK policy erodes the pounds relative appeal. At the same time, the ECB’s earlier rate cuts are beginning to stabilise economic activity across the single-currency bloc.

Political risk remains a drag on the euro, particularly in France, but sentiment is no longer uniformly negative. As a result, GBP/EUR in 2026 appears more likely to consolidate than trend higher – with future moves dependent on the economic performance of both the EU and UK.

GBP/USD: The Dollar Still Sets the Tone

The pound remains on the back foot against the dollar as US economic resilience continues to underpin a strong greenback. The Federal Reserve’s ability to keep policy restrictive for longer than expected has reinforced the dollar’s yield and safe-haven appeal.

By contrast, BoE rate cuts have left sterling vulnerable, increasingly viewed by markets as a funding currency rather than a growth play. Valuation support offered only limited relief in 2025, with rallies in GBP/USD proving short-lived.

Unless US economic data stalls, expect USD demand to remain high throughout 2026 with some softening should risk-appetite return to global markets.

EUR/USD: Recovery Depends on Politics as Much as Policy

The euro enters 2026 under less intense pressure than a year earlier but structural challenges persist. ECB easing has helped cushion economic downturn, yet wider growth is fragile and EUR confidence remains closely tied to geo-political risk.

Investors are watching for signs of a more expansionary fiscal stance in Germany and progress in resolving France’s legislative gridlock. Any improvement could help stabilise the euro, however the ongoing conflict in Ukraine could also weigh sentiment.

With US economic policy still firmly expansive and the Fed in no rush to cut interest rates aggressively, EUR/USD faces an uphill battle. Sub-parity moves remain a risk during bouts of volatility, however an outright collapse in the first part of 2026 remains unlikely.

Summary

GBP: Sterling is no longer enjoying the clear yield advantage that powered its late-2025 gains – leaving the pound more sensitive to domestic rate cuts and growth risks.
USD: Dollar strength looks set to continue in the early part of 2026 – supported by resilient US economic growth, restrictive Federal Reserve policy and its safe-haven status in an uncertain geopolitical and trade environment.
EUR: The euro is showing tentative signs of stabilisation as ECB easing feeds through to activity, but political uncertainty and weak growth limit upside.

Hedging

Overall, 2026 looks set to be a year of tighter ranges, episodic volatility and fewer one-way trades – reinforcing the case for active currency management and well-structured hedging strategies.

Medlock & Thames can offer tailored solutions, such as:

Forward Contracts: Lock in exchange rates for future transactions to protect against adverse movements in GBP/EUR, GBP/USD, or EUR/USD
Multi-Currency Accounts: For businesses operating across regions, maintaining accounts in multiple currencies can help mitigate transaction timing risks
Dynamic Hedging: Offering real-time analytics and automated tools to adjust positions as market conditions shift
Business Finance: Tailored finance options available to help unlock growth potential

If you’d like to discuss anything in this article further, please contact myself at cg@medlockandthames.com or +44(0)161 250 3376

All the best for the year ahead,

Christopher Gutfreund
Founder | Medlock & Thames