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<\/a><\/p>\nStrong economic growth in countries like Portugal, Spain, Greece and Italy, as well as ambitious defense spending plans by Germany, have boosted the attractiveness of holding euro assets. The euro, as the second-most traded currency after the dollar, has also benefited from the shift away from US assets in the trade war era.<\/p>\n
Hong Cheng, head of fixed income and currency research at Morningstar Wealth, says in her article, The Dollar\u2019s Decline: Implications of a Weaker USD for Investors<\/a> that the euro is not yet in a position to challenge the dollar\u2019s status.<\/p>\n \u201cThe US dollar\u2019s weakness in 2025 likely signals a turning point in its long cycle of strength\u2014though not the end of its global dominance.\u201d<\/p>\n She expects the Japanese yen to make the biggest gains of all the major currencies against the US dollar in 2026. The pound is forecast to make a gain of 1.5% against the dollar, with the euro making only modest headway after a very strong year in 2025.<\/p>\n Analysts at Bank of America say the euro could continue to rally against the dollar in 2026 but think sterling could also rally against the euro, if UK economic growth is better than expected in Q1. They add that with the Autumn Budget now over, the political risk premium attached to owning sterling will fade.<\/p>\n What’s the Outlook for UK Government Bonds in 2026? A strong year for the pound against the dollar came despite a period when UK monetary policy was being loosened, with the Bank of England cutting rates four times in 2025.<\/p>\n Lower interest rates reduce the attractiveness of holding a country\u2019s currency and assets, because higher yields can be found elsewhere. But it also depends on interest rate moves made by other central banks, such as the Federal Reserve.<\/p>\n With sluggish economic growth and a weakening labor market, the Bank of England could play a key role by lowering interest rates further to stimulate economic activity amid falling inflation<\/a>.<\/p>\n But some aren\u2019t convinced this will happen quickly. As the UK approaches its \u201cterminal\u201d or neutral rate, the Bank\u2019s Monetary Policy Committee is likely to remain cautious.<\/p>\n Financial markets currently price in a further two rate cuts in 2026, but the exact timing is uncertain.<\/p>\n Sterling is being boosted in the short-term by this uncertainty, says Kathleen Brooks, research director at XTB \u201cas investors price out the prospects of a series of rate cuts from the BOE in the coming months.\u201d<\/p>\n![\"The](\"https:\/\/www.newsbeep.com\/il\/wp-content\/uploads\/2026\/01\/7EPP4O64FFEJJDKMWM2KH5X764.png\")
<\/a>Bank of England Holds the Key to GBP Performance in 2026<\/p>\n
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<\/a>UK Political Risk Could Still Weaken Sterling<\/p>\n