According to Morgan Stanley, the year 2026 is likely to split into two very different phases. In the first half of the year, the bank expects renewed pressure on the US dollar, allowing GBP/USD to climb toward 1.36. But in the second half, analysts anticipate a reversal, with a stronger dollar dragging the pair back down to around 1.29.
Morgan Stanley also expects the Federal Reserve to deliver additional rate cuts early in 2026, bringing the Fed Funds rate down to 3.00% — a move that would weaken the dollar’s support. However, the bank does not expect further cuts beyond the second quarter. Instead, shifting market expectations and improving US economic performance may help the dollar regain momentum later in the year.
As for the Bank of England, Morgan Stanley projects a more dovish trajectory: a series of rate cuts from 4.00% to 2.75%, driven by continued disinflation and growing vulnerabilities in the labour market.
According to the bank, this policy shift could reshape the broader market narrative — reducing the pound’s appeal internationally as it loses its status as an attractive currency for carry trades.