The FTSE 100’s brief push through 10,000 has sharpened the tone across UK risk assets, pointing to confidence in earnings durability, reasonable valuations and a clearer runway for overseas inflows as policy pressures start to fade.

UK assets have begun the year on a firm footing, with the FTSE 100 printing a new record at 10,052. The move has not been matched in FX. Sterling is mixed as 2026 opens, with holiday-thinned liquidity still shaping price action.

• GBP/EUR trades near 1.1470, broadly pinned to the range established since Christmas as turnover remains subdued.

• GBP/USD slips to around 1.3434, off the 1.3530 high seen ahead of New Year’s Eve.

Even so, stronger UK equities argue for a supportive backdrop for sterling once market participation normalises. Both GBP/EUR and GBP/USD typically respond positively to improved risk sentiment, so further equity strength would be consistent with renewed upside in the crosses, other things being equal.

The key offset is rates. A softer UK labour market and cooling inflation momentum would narrow sterling’s rate support. If the Bank of England delivers further cuts, front-end gilt yields should drift lower, reducing the UK’s yield advantage that has helped underpin the currency in recent years. In practice, weaker relative yields can mean less incentive for international investors to hold sterling.

This is a central reason why many forecasts lean cautious on GBP for 2026. That said, two scenarios could challenge consensus. First, inflation could prove sticky, limiting the scope for rate reductions and preserving sterling’s carry appeal. Second, growth could surprise to the upside and stabilise the labour market, which would likely feed through to firmer GBP pricing.

Policy remains the swing factor. A steadier, more business-friendly tone from government would improve confidence at the margin. If policymakers avoid fresh uncertainty and keep the framework predictable, the UK economy could beat expectations, with sterling better placed to do the same.

Looking ahead

• UK inflation and labour releases for signs the BoE can, or cannot, accelerate easing.

• Gilt front-end moves as the primary signal for sterling’s yield support.

• Whether the FTSE’s new highs broaden out, supporting the risk backdrop for GBP.

• Government messaging on tax, regulation and investment as a driver of confidence.