Pound set for biggest yearly rise against dollar since 2017, down vs. euro

By Samuel Indyk

LONDON, Dec 31 (Reuters) - The British pound was a touch softer against the dollar on Wednesday but was still heading for its biggest annual rise in eight years.

However, the pound has fallen against the euro in 2025 and is set to end the year as the worst-performing major European currency. 

Sterling was last down 0.2% against the dollar at $1.3436. For the year, the pound is up 7.5%, its biggest annual jump since a 9.5% rise in 2017. 

The euro, Swiss franc, Norwegian and Swedish crowns have gained between 13% and 19% against the dollar this year. 

Against the euro, the pound was down 0.1% on Wednesday. It has fallen over 5% to 87.24 pence in 2025, its biggest annual drop against the single currency since 2020.

FISCAL WORRIES CAP GAINS

While the pound has had a strong 2025 against a dismal dollar, the backdrop for sterling in the second half of the year was of domestic political worries, concerns about Britain's public finances and stagnant growth.

The big focus for currency traders was the Autumn budget but November's fiscal event passed without too much fuss, alleviating some of the pressure that had been building for the pound in the second half.

The pound's performance in 2026 will likely depend on the Bank of England's monetary policy actions.

The central bank lowered borrowing costs four times in 2025, including in December, although the rate-setting Monetary Policy Committee remains divided and policymakers signalled that the already gradual pace of rate cuts could slow further.

Money market traders are not fully pricing in another rate cut until June. Around 40 basis points of easing is priced by year end, implying around a 60% chance of a second rate cut.

Kevin Thozet, a member of the investment committee at Carmignac, said that with the budget in the rearview mirror, a slowing economy, weakening labour market and elevated bond yields will allow the BoE to further lower interest rates.

"The conundrum for the policymakers has eased at least for the short term," he said.  

(Reporting by Samuel IndykEditing by Frances Kerry)