Buy your holiday money now. The pound is in for a rocky year
The pound, arrows and a graph illo
After the joys and excesses of the festive period, the promise of a summer holiday in the sun is sometimes the only thing that keeps you going as the bleak winter days roll in.
But prospective holidaymakers might be wise to hurry up and buy their travel money sooner rather than later: 2026 is shaping up to be a rocky year for the pound, as a host of domestic factors combine to limit the purchasing power of hard-earned UK wages abroad.
The actions of Rachel Reeves, leadership plots against Sir Keir Starmer and the Bank of England each threaten to erode the worth of Britain’s currency this year.
The gloom is in stark contrast to the past 12 months, when British holidaymakers could get more for their money on trips to the US after the pound enjoyed its best year since 2017 against the dollar.
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0101 Value of pound predicted to fall
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Why is the year ahead looking worse for the pound? A good place to start is the Chancellor’s Budget and its after effects.
Despite her continual claims that growth was her number one priority, Ms Reeves slapped £26bn of tax rises on the economy in her speech in November. It means the already-flatlining economy is unlikely to pick up in 2026.
“The economy is heading into 2026 with little or no momentum,” said Paul Dales, chief UK economist at the consultancy Capital Economics.
That is not an ideal backdrop for the pound. Stuart Jenkins, an analyst at Goldman Sachs, said tax rises meant the “hard yards still lie ahead” for sterling as it “heightened risks to the labour market”.
Britain’s labour market has been showing signs of weakening for some time as businesses grapple with weak growth. Unemployment rose to 5.1pc in the three months to October, which was the highest level in four years. Over the same period private sector pay growth, closely watched by the Bank of England, slumped to 3.9pc, its weakest since 2020.
Capital Economics forecast that unemployment will hit 5.2pc in the early part of this year, which has left the Bank of England in a tricky position.
It may be forced to take action to protect jobs and support the economy – but deliver a further blow to the purchasing power of the pound.
Last month, the Bank did just that as it lowered interest rates from 4pc to 3.75pc, down from the peak of 5.25pc in August 2024. Lower interest rates reduce the returns on UK assets, pushing foreign investors to shift money elsewhere.
Money markets are betting that the Bank of England will lower borrowing costs one more time by June at the latest, with around a 50-50 chance of another cut by November.
Economists and traders alike were surprised when inflation dropped further than expected from 3.6pc in October to 3.2pc in November, sending the pound sharply lower.
“We suspect investors are still under-pricing 2026 easing,” said Andrew Wishart, senior UK economist at Swiss private bank Berenberg – another way of saying traders are misjudging the likelihood of interest rate cuts this year.
The Chancellor announced support for energy bills, capped fuel duty and froze train fares in her most recent Budget, which the Bank of England acknowledged would likely lower inflation by around half a percentage point by April.
The fallout from Rachel Reeves’s second Budget could spell the start of a downward spiral for the Bank Rate – Mark Kerrison/In Pictures via Getty Images
Berenberg and Capital Economics both think this, along with the weakening in the jobs market, will mean the Bank will lower interest rates to 3pc in 2026.
This would likely send the pound falling, particularly against the euro. The European Central Bank has kept rates on hold at 2pc since June last year, and is now at the end of their cycle of rate cuts following the inflation crisis triggered by the Ukraine war.
While the US Federal Reserve cut rates three times in a row at the end of 2025, questions have been raised about whether it will do so again before its chairman Jerome Powell leaves his role in May.
As a result, many traders are shorting sterling – betting on a decline in the value of the currency.
“We continue to remain positioned short in the pound, based on the view that the UK’s growth prospects will continue to be depressed, and this should lead to monetary easing as an offset,” said Mark Dowding, chief investment officer at RBC BlueBay Asset Management, which looks after $560bn (£418bn) of client money.
Not all in the market are convinced sterling is heading lower. James Bilson, a fixed income strategist at Schroders, said more rate cuts by the Bank of England than the market expects “would weigh on sterling in isolation, but other factors could offset this”.
“We believe growth will improve as a result of the ending of uncertainty around the Budget,” he says. “While the Budget wasn’t game-changing, and some of the more negative policies for growth were avoided, the uncertainty it caused hampered growth.”
But all bets could be off if we see a leadership challenge to Starmer.
Investment bank Panmure Liberum warned that a Left-wing coup could have “loud echoes” of Liz Truss’s mini-Budget crisis.
In a note published last month, just hours after Andy Burnham was said to be plotting to replace the Prime Minister, Panmure Liberum said a Downing Street shake-up could prompt the pound to fall to its lowest level since 2022.
Simon French, chief UK economist, said he could not rule out a “naïve” new Left-wing leader using borrowing to fund higher public spending and triggering a Truss-style crisis in the process.
Under a worst-case scenario, French forecast a sharp fall in the pound against the dollar from around $1.33 today to $1.20.
French said: “In the UK, despite a Parliament with still 3.5 years to run, the chances of a leftward pivot from the Labour Party are increasing and may come to a head next spring.”
“The reality is that a lack of confidence in UK governance as well as the economic outlook appears to have driven a shift out of sterling in a trend that looks set to continue in 2026,” says analyst Michael Hewson.
He said a “mind-numbingly economically illiterate approach to the nation’s finances from the Government has prompted an even larger moron premium on UK gilts, as well as a failure to learn the lessons of the October 2024 Budget”.
“This failure to learn from 2024 thus repeated the same mistakes this year, sucking the life out of business, as well as consumer confidence, and then going on to simultaneously raise taxes on both,” Hewson adds.
In other words, it may be a good idea to lock in the best holiday money rates while you still can.
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