Sterling Defies Expectations: Why the Pound Remains Strong in 2026

The British pound has been showing strength in 2026, despite domestic economic indicators suggesting it should be weakening. Unemployment has risen to 4.9%, payroll employment has been declining for two years, and the IMF expects only 1% growth this year.

However, a closer look at exchange rates reveals that they actually price the expected path of policy rather than today's setting. The Bank of England (BoE) has kept interest rates steady at 3.75%, but market expectations have shifted from further easing to renewed tightening by late summer.

This shift is reflected in the voting record of the Monetary Policy Committee, which has seen a reversal from four cut votes in February to three hike votes in July. The BoE's decision to hold rates steady was effectively priced in, and the market reaction was more about the changed expectations than the unchanged rate itself.

The pound's real yield edge against the euro is around 150 basis points, which attracts carry trade flows into sterling. However, this flow is fragile and can unwind quickly if volatility increases.