Pound Sterling Holds Near Multi-Year High Amid Dollar Weakness and Firm UK Data

LONDON, 28 January 2026 – The British Pound traded just below the $1.38 mark on Wednesday, hovering close to its strongest level since August 2021. Sterling’s resilience is primarily attributed to broad-based US Dollar weakness ahead of a pivotal Federal Reserve policy announcement, coupled with stronger-than-expected UK retail sales data that has tempered expectations for near-term Bank of England interest rate cuts.

Current Market Performance

The GBP/USD exchange rate was recorded at 1.3774 on 28 January, representing a daily decline of 0.53%. Despite this intraday dip, the Pound has demonstrated significant strength over broader timeframes, appreciating 1.94% over the past month and surging 10.64% over the last 12 months. The currency’s performance reflects a complex interplay between domestic economic indicators and global monetary policy divergence.

Key Data and Drivers

Recent UK economic data has provided mixed signals for policymakers. Office for National Statistics (ONS) figures showed Retail Sales grew by 0.4% month-on-month in December, defying expectations of a 0.1% decline. On an annualised basis, consumer spending rose by 2.5%. This resilience in consumer activity, alongside reports of accelerating shop price inflation, has revived concerns about persistent domestic price pressures, potentially constraining the Bank of England’s capacity for aggressive monetary easing.

Conversely, the US Dollar has faced headwinds from political uncertainty, including government shutdown concerns and renewed tariff threats from the Trump administration, which has expressed comfort with the currency’s recent decline. All eyes are now on the Federal Reserve’s policy verdict for clues on the timing of future interest rate adjustments.

Sterling: Key Facts and Figures

Historical Context and Structural Shifts

Sterling’s trajectory cannot be divorced from its recent history. The 2016 Brexit referendum triggered a sustained depreciation, with the Pound losing approximately 15% of its value against the Euro from pre-vote levels. This was driven by financial markets repricing the UK’s economic prospects due to anticipated trade frictions and prolonged political uncertainty. Historical crises, such as ‘Black Wednesday’ on 16 September 1992 – when the UK was forced to exit the European Exchange Rate Mechanism – also underscore the currency’s sensitivity to policy credibility and external shocks.

Outlook and Diverging Policy Paths

The near-term path for Sterling hinges on the divergent monetary policy trajectories of the Bank of England and the Federal Reserve. While stronger UK data has pushed back expectations for imminent BoE rate cuts, the Fed’s stance remains a critical variable. Analyst forecasts for 2026 remain contingent on these dynamics, with institutions like J.P. Morgan forecasting GBP/USD at 1.37 by September 2026, and ING projecting a move to 1.36 over a 12-month horizon.

Risks are asymmetric. A more hawkish-than-expected Fed or a sharper deterioration in UK growth could pressure the Pound. Conversely, a resolution of US political uncertainty or a more resilient UK economy could provide further support.

Frequently Asked Questions

Why is the Pound Sterling so strong right now?

The Pound’s strength is largely a function of US Dollar weakness, driven by political and policy uncertainty in the United States. Concurrently, robust UK retail sales data has reduced market expectations for aggressive interest rate cuts from the Bank of England in the near term, supporting the currency.

What long-term impact did Brexit have on the Pound?

Brexit led to a significant and sustained depreciation of Sterling, as financial markets priced in increased trade costs and economic uncertainty. The Pound remains approximately 15% weaker against the Euro compared to its pre-referendum level in June 2016, reflecting a permanent reassessment of the UK’s economic outlook.

What is the forecast for the Pound in 2026?

Forecasts are mixed and highly dependent on central bank policies. Models from Trading Economics suggest a potential rise to $1.40 over the next 12 months. However, many bank analysts are more cautious, citing fiscal challenges and global trade tensions, with year-end forecasts clustering around the $1.35-$1.37 range.