The pound hits a two-month high against the euro, with a strong trend expected to continue.

On Tuesday, the pound hit its highest level against the euro in two months, while the exchange rate against the dollar remained stable in light holiday trading, despite the lack of significant news to impact the pound significantly. The pound against the euro showed slight activity, rising to 87.03 pence per euro at one point, marking the largest increase since mid-October, but the daily increase was still only slightly above 0.1%. The pound against the dollar remained steady at 1.3518, slightly below the three-month high reached last week. Trading during the Christmas holiday period was light in the UK, and the same is expected on the eve of the New Year holiday. Therefore, the pound's movement is still mainly influenced by the Bank of England's meeting in early December. The Bank of England cut interest rates after a narrow vote by policymakers, but also hinted that the already slow pace of rate cuts could be further slowed. If this expectation comes true, the pound against other currencies (especially the dollar) will continue to remain strong, as the market expects the Federal Reserve to continue its loose monetary policy next year. Major Wall Street investment banks have a cautious optimistic consensus on the forecast for the pound's exchange rate in 2026: most institutions expect the pound against the dollar to strengthen or at least remain stable, based on the widespread expectation of a weakening dollar. Banks like Morgan Stanley, UBS, and RBC have a notably bullish outlook, predicting the pound against the dollar to reach a range of 1.43 to 1.51 in 2026, possibly even reaching the highest point since the UK's Brexit referendum in 2016. These optimistic expectations are mainly based on the Federal Reserve's ongoing rate cut cycle weakening the dollar's interest rate advantage, while the Bank of England is expected to take a slower and more cautious pace of rate cuts, making the pound more attractive. Despite concerns about the UK's domestic fiscal situation, some banks believe the market has overreacted, providing opportunities to buy on dips. However, the market is not one-sided, and institutions like Goldman Sachs have a neutral stance, believing the pound's upward momentum may stall around 1.35-1.36. Analysts at Goldman Sachs pointed out in a report on Tuesday that with the UK labor market weak, they expect overall inflation in the UK to further decrease in the coming months. They stated, "Therefore, we expect the Bank of England to cut rates three times in 2026, eventually bringing interest rates down to 3%, below current pricing levels." Additionally, Credit Suisse holds a bearish view, predicting a significant rebound of the dollar and a weakening of the pound to around 1.31. This indicates that there is still divergence and uncertainty in the market about future exchange rate movements. Overall, the outlook suggests that the performance of the pound in 2026 will heavily depend on the global macroeconomic environment, especially the actual rate cut path of the Federal Reserve, the economic stability in the UK, and potential risks of a global economic recession. Despite these variables, the mainstream view on Wall Street leans towards a positive year for the pound.