Why GBP/USD Could Be a Strategic Carry Trade in 2026 Amid Dovish Fed Outlook

The GBP/USD pair has long been a focal point for carry trade strategies, but 2026 could mark a pivotal year as diverging monetary policies between the U.S. Federal Reserve (Fed) and the Bank of England (BoE) create a compelling yield differential. With the Fed signaling a dovish pivot and the BoE adopting a more aggressive easing path, the structural advantages for GBP/USD carry trade positioning are becoming increasingly pronounced.

Fed's Dovish Trajectory: A Tailwind for Carry Trade

The Federal Reserve's 2026 monetary policy outlook is firmly dovish, with projections indicating a gradual reduction in interest rates from the current 3.50%-3.75% range toward 3% by year-end. This trajectory is supported by the December 2025 Summary of Economic Projections (SEP), which highlights a wide range of forecasts among Fed governors, with the most dovish estimates projecting a long-term policy rate of 2.625%. While inflation remains above the 2% target, the Fed's cautious approach-anticipating 50 basis points (bps) of rate cuts in 2026-reflects confidence in the U.S. economy's resilience, including a 4.3% GDP growth in Q3 2025.

The appointment of a new Fed Chair in May 2026 could further delay aggressive rate cuts, as the incoming leadership may prioritize stability over rapid easing. This measured approach contrasts with the BoE's more aggressive stance, creating a widening yield gap that favors the U.S. dollar.

BoE's Gradual Easing: A Counterbalance to Fed Caution

The Bank of England, meanwhile, is expected to adopt a more aggressive easing path in 2026. UBS forecasts two additional 25-basis-point rate cuts-likely in February and April-bringing the terminal rate to 3.25%. This would reduce the BoE's key rate from the current 4.50% to 3.25%, a 125-bps cut over the year. By comparison, the Fed's projected 63-bps reduction by year-end leaves a significant 60-bps differential in favor of the U.S. dollar.

The BoE's cautious easing is driven by persistent UK inflation (3.1% as of late 2025) and a slower cooling labor market compared to the U.S.. However, the BoE's December 2025 rate cut to 3.75%-its lowest since January 2023-has already signaled a shift toward accommodative policy. This divergence creates a favorable environment for GBP/USD carry trade positions, as the Pound's lower yield relative to the Dollar amplifies returns for investors.

Historical Performance: A Blueprint for 2026

GBP/USD's performance in 2025 offers a compelling precedent. The pair rebounded from a 15-month low of 1.2100 in January to a four-year high of 1.3789 in July, ultimately closing the year around 1.3400-a 6.5% annual gain. This rally was fueled by the Fed's dovish pivot and the BoE's slower easing cycle, which maintained a positive yield differential. For 2026, the projected 100-bps rate cuts by the BoE versus the Fed's 63-bps reduction suggest a continuation of this trend as the yield differential widens.

Technical indicators also support optimism. GBP/USD has recently traded above key levels such as the 200-day Simple Moving Average, with traders eyeing 1.3500 and 1.30 as critical thresholds. A massive put wall at 1.30 could act as a structural support, reinforcing the pair's bullish momentum.

Carry Trade Positioning: Strengthening Fundamentals

Recent market positioning underscores GBP/USD's strategic appeal. The pair reached a 3-month high of 1.3473 in late 2025, driven by the BoE's hawkish rate cut in December 2025 and the Fed's dovish forward guidance. Open interest and net long/short ratios indicate growing conviction among traders, with GBP/USD futures contracts showing increased demand for short positions as the yield differential widens as the yield differential widens.

The BoE's December 2025 rate cut to 3.75%-coupled with UK inflation declining to 4.1%-has reinforced expectations of further easing in 2026. Meanwhile, the Fed's 3.5%-3.75% target range as of December 2025 provides a floor for the Dollar, limiting downside risk for carry trade positions.

Conclusion: A Strategic Opportunity in 2026

The GBP/USD carry trade is poised to benefit from the Fed-BoE policy divergence in 2026. The Fed's dovish trajectory, combined with the BoE's more aggressive easing, creates a favorable yield environment for investors. Historical performance, technical strength, and current positioning all point to a continuation of this trend. While risks such as UK fiscal uncertainty and U.S. inflation persistence exist as markets anticipate further rate cuts, the structural advantages of GBP/USD as a carry trade asset remain compelling.

As markets anticipate further rate cuts from the Fed and the BoE, GBP/USD could emerge as a cornerstone of a diversified carry trade portfolio in 2026.