British Pound to Benefit from "Improving Credibility"

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The British pound is expected to recover in 2026, with Corpay citingg improving fundamentals and relative yield support.

Corpay says sterling has "broken free" from an exceptionally narrow trading range and is "gaining altitude against a beleaguered US dollar," directly shaping its outlook for GBP/USD and informing expectations for broader pound performance.

“After nearly two years confined to an exceptionally narrow trading range, sterling has finally broken free,” Karl Schamotta, Corpay's chief strategist, says.

He predicts the advance may prove uneven, with residual shocks from last year’s surge in trade and fiscal-policy uncertainty still working through business investment, labour market conditions and household spending.

These dynamics could lead markets to revise expectations for the terminal policy rate set by the Bank of England, creating intermittent volatility for the pound.

Above: The GBP is expected to be subject to more interest rate cuts than peers in the coming year.

Political risk is identified as another potential source of disruption, with Corpay noting that polling showing Labour below Reform and level with the Conservatives could make the May 7 local elections a focal point for renewed uncertainty.

Corpay, a major global international payments firm, says such outcomes could reopen questions around the authority of Keir Starmer, even as fiscal discipline remains central to investor confidence.

Image courtesy of Corpay.

Another potential roadblock is that the UK continues to rely on the "kindness of strangers" to fund its twin deficits, leaving it vulnerable to downshifts in sentiment.

Nevertheless, markets are seen to be less likely to anticipate a repeat of the fiscal turmoil seen in 2022.

The firm says the government has demonstrated awareness of the need to keep investors onside and has set out tax and spending plans aimed at stabilising the debt-to-gross domestic product ratio over time.

Liquidity conditions in gilt markets are improving steadily, according to Corpay, easing pressures that have weighed on financial conditions.

Image courtesy of Corpay.

The firm says a turning point could emerge later in the year as the effects of earlier monetary easing filter through the economy and front-loaded government spending begins to take effect.

Corpay says hiring intentions should also firm as policy uncertainty recedes and global demand edges higher, while a gradual easing in term premia driven by fading fiscal concerns would further support sterling.

With UK policy rates expected to remain modestly above their U.S. counterparts, Corpay says the pound should regain appeal as a G10 carry destination.

"Fundamentally undervalued and still carrying the burden of past shocks, the pound may stage a slow but uneven recovery in the second half of 2026," Corpay says.