Sterling surpasses 1.34 amid dollar's worst year since 2017

Friday 02 January 2026 - 08:20

By: Dakir Madiha

Sterling surpasses 1.34 amid dollar's worst year since 2017

The British pound traded above 1.34 against the US dollar on Thursday, building on its strongest annual performance since 2017 as divergent central bank policies and growing doubts over the Federal Reserve's independence weighed heavily on the greenback.

In early Asian trading on January 2, the pound hit around 1.3480, capping off an 8 percent rise for 2025. This surge contrasted sharply with the US dollar index, which posted its steepest annual drop in eight years at 9.4 percent. Factors dragging down the dollar included the Fed's rate cuts, erratic trade policies, and intensifying questions about the central bank's autonomy under President Donald Trump.

The Bank of England and the Federal Reserve have charted increasingly divergent paths. The BoE trimmed its key rate to 3.75 percent from 4 percent in a tight 5-4 vote on December 17, with Governor Andrew Bailey indicating a likely gradual downward trajectory. By comparison, the Fed lowered rates to a 3.50-3.75 percent range last month but projected a more cautious pace, forecasting just one quarter-point cut in 2026.

Financial markets now see only a 15 to 24 percent chance of a Fed rate cut at its January 28-29 meeting, according to the CME FedWatch tool. These tempered expectations stem from lingering inflation worries and deep divisions within the Federal Open Market Committee, highlighted by three dissenting votes in December—the most fractured outcome in years.

President Trump has ramped up pressure on the Fed, vowing to appoint a chair committed to immediate rate cuts and full alignment with his views. Jerome Powell's term as chair ends in May 2026, with White House economic advisor Kevin Hassett and former Fed Governor Kevin Warsh emerging as leading contenders. Market bets on a more dovish successor have further eroded dollar strength, Reuters reports.

Despite cutting rates by 150 basis points since August 2024, BoE policymakers stressed caution on further easing. Four members voted to hold rates steady in December, pointing to stubborn inflation, shifts in wage and price dynamics, and structural economic changes. Analysts attribute the pound's advances largely to dollar weakness rather than inherent sterling strength; against the euro, the currency has moved more modestly amid UK growth concerns and fiscal strains.