BNP Paribas analysts see UK GDP growth slowing to 1.1% in 2026 due to carryover effects, though quarterly expansion should stabilize at 0.3% helped by monetary easing and higher defence spending. Inflation is expected to return to target only gradually, keeping policy restrictive. The analysts project GBP/USD at 1.3 in Q4 2026 and a moderate rise in EUR/GBP to 1.20.
UK growth, BoE path and FX view
“Activity is expected to slow slightly in 2026, to 1.1% due to unfavourable carryover effect, after a +1.4% GDP growth in 2025.”
“Despite downside risks in the labour market and difficulties in industry, quarterly growth is expected to return to a higher and more stable pace in 2026 (+0.3% q/q on average) thanks to monetary easing.”
“Inflation would only return to target very gradually, and monetary policy would remain restrictive, despite a new rate cut in Q1 2026, bringing the Bank rate down to 3.5%.”
“With inflation falling more sustainably towards the 2% target, a new phase of normalization would begin, with two further rate cuts in H1 2027.”
“We expect the dollar to continue depreciating against the euro. Structural changes in fiscal policy and the expected strengthening of growth in Europe, coupled with the slowdown in the United States, underpin our forecast of a gradual and moderate rise in the EUR/GBP exchange rate by the end of 2026 (1.20 in Q4 2026). Conversely, we anticipate a slight depreciation of the yen and the GBP against the dollar (USD/JPY 160 and GBP/USD 1.3 in Q4 2026). “
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)
Source: https://www.fxstreet.com/news/gbp-gradual-normalization-with-modest-dollar-losses-bnp-paribas-202602091306
