What happened in November?
Sterling sentiment dominated by the Budget in the UK
It was a month of “will she, won’t she” in the UK as investors tried to second guess Chancellor Rachel Reeves’ budget plans and digest rumours of income tax hikes and increased welfare spending.
In the end, markets reacted calmly to the budget, delivered on 26 November. The pound enjoyed a slight budget boost, rebounding against the dollar and also rising against the euro. Sterling has strengthened by 0.23% against the dollar over the last month and 3.88% over the last year. However, the pound may suffer if deeper analysis uncovers longer term concerns about the state of UK finances. .
Euro enjoys a strong year
The euro slipped slightly against the dollar in November but remains 9.6% up on the greenback over the last 12 months. As we reach the end of 2025, the euro also remains well up on the pound, gaining 5.5% of value in the last year.
Dollar falls on rate cut expectations
After a generally resilient month, the dollar index fell in the last week of November as investors increasingly priced in a Federal Reserve (Fed) interest rate cut before Christmas. Interest rates are one of several factors that influence exchange rates, but lower rates can make currencies less attractive to investors.
What’s in store for December and beyond?
December is a short month and, as we approach the end of the year, thoughts of money market watchers naturally turn to 2026.
As we’ve seen in recent years, unexpected events can trigger titanic exchange rate volatility. While we can’t predict a global health pandemic or a damaging trade war, we can highlight known influences on FX rates and suggest ways in which they may shape markets over the coming year.
Early EU interest rate easing boosts the euro
With eurozone interest rates at 2.15%, the European Central Bank’s (ECB) easing cycle may already be over. Inflation is relatively stable in the bloc, giving certainty to businesses and markets and boosting the euro.
The euro had a strong 2025 and will enjoy the advantages of comparatively low inflation and settled interest rates in the early months of 2026. With predicted eurozone GDP growth of around 1.4% in 2026, many investors expect the euro to at least hold on to the gains it made this year. One possible risk to this forecast is the uncertain political situation in France, the EU’s second largest economy.
The pound may face a bumpy ride
The easing cycles of the US Fed and the Bank of England (BoE) are some way behind the EU, with interest rates sitting at 4-4.25% and 4% respectively. As inflation dips and economies cool, we may see rate cuts by both central banks in December.
In the longer term, investors have less confidence in the pound than the euro, with sterling remaining vulnerable to fiscal uncertainty. Some economists worry that back-loaded elements of the government’s tax programme, announced in November’s budget, could undermine investor confidence as impacts emerge in 2026. The pound may be in for a bumpy ride, especially in the first half of the year.
Dollar volatility may return
Steep fluctuations in the strength of the dollar were mostly driven by external events in 2025, from President Trump’s “Liberation Day” tariff announcement to the disruptive uncertainty of an on-again-off-again trade war with China.
While the dollar has stabilised on the back of a series of tariff-limiting trade deals and a cooling of tensions with China, Washington’s unpredictability may limit the chances of a serious rebound in 2026. The prospect of greater political inertia following potential Democrat gains in November’s midterm elections could also influence investors.
For its part, investment bank Morgan Stanley is predicting a steep fall for the greenback in the first half of 2026, before stronger economic growth brings the dollar index back to somewhere near its current position by the end of the year.
The takeaway?
November followed a familiar pattern for 2025, with a resilient euro and marginal gains or losses for the dollar and pound. While the dollar has rallied a little in recent months, it has lost value against both competing currencies over the last year.
While nobody should rule out a surprise or two, at the moment we expect the euro to consolidate gains in 2026 while the dollar and pound tread water. Sterling is vulnerable to the UK’s soft growth prospects, while the greenback is predicted to slide in the first half of the year before rallying in the second.
In any scenario, some exchange rate volatility is to be expected. Businesses with a well-considered FX strategy can protect revenue and benefit from shifting exchange rates, whatever the year ahead brings.
