The British pound edged slightly lower against the dollar on Wednesday but remained on course for its strongest annual performance in eight years, buoyed by broad

dollar weakness.

Sterling was last down 0.2% at $1.3436. Despite the modest dip, the pound has gained 7.5% so far this year, marking its biggest annual rise since a 9.5% advance in 2017.

Against the euro, however, the pound has struggled. It slipped 0.1% on Wednesday and is down more than 5% in 2025, trading at 87.24 pence per euro. That represents its steepest annual decline against the single currency since 2020, making it the worst-performing major European currency this year.

Other European currencies have significantly outpaced sterling versus the dollar. The euro, Swiss franc, Norwegian krone and Swedish krona have all risen between 13% and 19% against the greenback in 2025.

Fiscal worries cap gains

While the pound has benefited from dollar weakness, its gains have been tempered by domestic concerns, including political uncertainty, worries over Britain’s public finances and persistently weak economic growth in the second half of the year.

Currency markets were focused on the government’s Autumn budget, but November’s fiscal announcement passed without major disruption, easing some of the pressure that had weighed on sterling.

Looking ahead, the pound’s performance in 2026 is expected to hinge on the Bank of England’s monetary policy trajectory. The central bank cut interest rates four times in 2025, including a move in December, though policymakers have signalled that the pace of easing could slow as divisions persist within the rate-setting committee.

Money markets are not fully pricing in another rate cut until June, with about 40 basis points of easing expected by the end of next year — implying roughly a 60% chance of a second cut.

Kevin Thozet, a member of the investment committee at Carmignac, said a slowing economy, a weakening labour market and elevated bond yields could give the BoE scope to ease policy further.