Pound-to-Dollar Sees 2026 Gain Evaporates on Fed Shift

🎯 GBP/USD year-ahead forecast: Consensus targets from our survey of over 30 investment bank projections. Request your copy.

Above: File image of Stephen Miran.

Pound sterling is now nearly flat on the year against the dollar.

The dollar's stellar comeback continues as the odds of further rate cuts at the Federal Reserve receded dramatically.

The pound to dollar conversion is now just 0.14% up on the year at 1.3473, having been as much as 3.25% higher just three weeks ago when investors fretted that the dollar was at risk of adverse policy activism and a series of Federal Reserve rate cuts.

But fast forward to late February and even the Fed's 'arch-dove' Stephen Miran is acknowledging there's probably limited scope to reduce interest rates from here.

Miran, an acolyte of President Donald Trump in the Federal Reserve, had previously advocated for materially weaker interest rates and a lower dollar, but seems to have now changed his tune.

Miran said in an interview published on Substack that he's leaning toward less aggressive cuts than he was two months ago, saying the economy has evolved a little differently than he expected.

"If I had no more data in hand right now and had to put a dot down at the March meeting, I would respond to the data again and probably end up moving my dot back to where it was in September," he said.

The shift in tone would fit with a President Trump who has grown increasingly concerned about inflation, given it is hurting his personal ratings and those of the Republican Party ahead of the November mid-term elections.

With an economy that is proving surprisingly resilient, Miran and other Fed decision makers are conscious they risk boosting inflation if they lower rates any further.

For the dollar, receding bets for rate cuts are proving supportive.

Above: Market bets for future Fed rate cuts have receded notably in February.

"The development we are seeing in unemployment for the US looks a bit like the one we have seen in Australia. The reserve Bank of Australia just hiked its interest rate. If similarities persist it might be hard to convince the FOMC to cut rates. We see no reasons to change our forecast of no cuts," says Nordea Markets.

"I think, and my colleagues think, that it is hard to look at the incoming data and think policy is meaningfully restrictive," said Jerome Powell, Chairman of the Federal Reserve, at the time of the January policy decision.

The U.S. economy added about 130K jobs in January, significantly above the consensus forecast (~65K), and that should ease concerns about rising unemployment at the Fed.

This week, investors bought dollars on further signs of economic strength, with housing starts for December outpacing consensus forecasts, and the University of Michigan February consumer sentiment index beat expectations (actual ~57.3 vs expected ~55).

🎯 GBP/USD year-ahead forecast: Consensus targets from our survey of over 30 investment bank projections. Request your copy.

The minutes to the January Fed meeting showed that it's the verdict of a number of FOMC members that the risks for rates are decidedly two-way on account of economic resilience: it could be a cut or a hike next.

Just talk of a hike resets the dollar-negative framework that has dominated FX market sentiment in 2026 and explains why the currency is rapidly retaking lost ground.

Potentially most important for the dollar is the admission by the likes of Miran that cuts aren't necessary. It signals a retreat from an unconventional monetary policy stance, which itself was detrimental to the dollar.

The dollar will benefit from certainty being restored as to the Fed's reaction function.

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