As part of our series exploring the outlook for key financial instruments and markets in the year ahead, our market analyst Michael Kramer assesses what might come next for the FTSE 100 and GBP/USD, following a strong 2025 for both. Both the FTSE 100 and the British pound experienced a reasonably strong year, with the FTSE rising by approximately 20% and the pound gaining roughly 8% against the US dollar. This came despite a challenging economic backdrop, with the unemployment rate rising, inflation remaining elevated, and economic growth essentially stalling. Even so, the FTSE could continue to benefit through 2026, given its heavy weighting toward financials and its increased exposure to rising metal prices.
Higher 10-year rates
Much of the outlook for both the pound and the FTSE is likely to be determined by the path of UK interest rates. UK 10-year gilt yields effectively stalled in 2025, moving largely sideways and remaining near their highest levels since 2008, reflecting a stagflation-like environment. This has occurred despite the Bank of England cutting rates six times since August 2024, and with markets currently pricing in one, and possibly two, additional rate cuts in 2026. That said, the rate-cutting cycle may be nearing its end. If the cutting cycle is nearing completion as economic conditions begin to improve, UK 10-year yields could rise again in 2026. From a technical perspective, the 10-year gilt appears positioned for such a move. Yields have repeatedly struggled to break above 4.9%, but more importantly, price action suggests the potential formation of a pennant pattern. If this pattern resolves in line with the broader long-term uptrend, a sustained break above 4.9% could open the door to a move towards approximately 5.25%.
