Pound "two extremes": set to achieve the largest increase in eight years against the dollar, but the worst performance in five years against the euro.

On Wednesday, the pound softened slightly against the US dollar but is still expected to achieve its largest annual gain in eight years. However, the pound is continuing to decline against the euro in 2025, and is expected to be the worst-performing major European currency this year. The pound fell by 0.2% against the US dollar, trading at 1.3436. So far this year, the pound has risen by 7.5% against the US dollar, marking its largest annual increase since it rose by 9.5% in 2017. The euro, Swiss franc, Norwegian krone, and Swedish krona have all risen by 13% to 19% against the US dollar this year. On Wednesday, the pound dropped by 0.1% against the euro. The pound has fallen by over 5% against the euro in 2025, marking its largest annual decline against the euro since 2020. Fiscal concerns dampen gains Despite the pound performing strongly against a weakened US dollar in 2025, its performance in the second half of the year has been impacted by domestic political concerns, worries about the UK's public finances, and stagnant economic growth. The focus for forex traders has been on the autumn budget, but November's fiscal events passed calmly, alleviating some of the pressure on the pound in the second half of the year. The pound's performance in 2026 could depend on the monetary policy actions of the Bank of England. In 2025, the Bank of England lowered interest rates four times, including a rate cut in December, but there are still divisions within the Monetary Policy Committee responsible for setting rates. Policymakers have also hinted that the already slow pace of rate cuts could be further slowed down. The currency market shows that traders have not fully priced in expectations of another rate cut before June next year. They expect around 40 basis points of easing before the end of next year, meaning there is about a 60% chance of a second rate cut. Kevin Thozet, a member of the Kamieniak Investment Committee, stated that with the dust settling on the budget, economic slowdown, weak labor market, and high bond yields will prompt the Bank of England to further lower interest rates. He said, "At least in the short term, policymakers face some relief in the dilemmas they are dealing with."