Will the Bank of England's upcoming interest rate cut create a rebound opportunity for GBP/USD?

Market Almost Settled: Bank of England’s 25 Basis Point Rate Cut Imminent

This Thursday (December 18), the Bank of England will announce its fourth interest rate decision of the year. Market consensus is highly unified—cutting rates by 25 basis points to 3.75%, hitting a three-year low. Data shows that market certainty about this rate cut has exceeded 90%. More notably, traders generally expect the Bank of England to cut rates once more before the end of April next year, indicating that the current easing cycle is accelerating.

However, internal voting may now be “divided.” Economists predict that the meeting could again see a 5-4 split, reflecting disagreements within the Bank of England’s decision-making body regarding economic outlook. Nonetheless, with the latest UK economic data cooling, the hawkish camp may be showing signs of loosening.

Clear Signs of UK Economic Cooling Pave the Way for Policy Shift

Recent UK economic data provide strong support for a rate cut. October GDP unexpectedly contracted by 0.1% month-on-month, contrasting sharply with the market expectation of a 0.1% growth, marking the second consecutive month of decline. The employment market is also weak—UK unemployment has risen to its highest level since early 2021, indicating significant pressure on the labor market.

Inflation trends are also turning clearly. UK November CPI annual inflation slowed to 3.2%, the lowest in eight months, below the market forecast of 3.5%. Core CPI was only 3.2%, below the expected 3.4%. Once this data was released, GBP/USD immediately fell below 1.3311 intraday, hitting a weekly low with a single-day drop of over 0.8%. Meanwhile, the UK 10-year government bond yield fell more than 7 basis points to 4.44%.

Fiscal support measures should not be overlooked. The UK Chancellor Rishi Sunak announced a budget plan in November, including freezing railway fares, extending fuel tax relief, and reducing household energy costs. These measures are expected to further lower inflation by 0.5 percentage points in the second quarter of next year, clearing policy obstacles for subsequent rate cuts by the central bank.

US Inflation Pressures May Ease, but Employment Risks Worsen

Meanwhile, US data is also changing. Fed official Williams recently signaled dovishly, stating that tariff-induced inflation shocks are one-off factors. More concerning is that downside risks to the employment market are increasing. This shift indicates that the Fed’s internal view on policy direction is adjusting.

US labor data is indeed grim. November added 64,000 non-farm jobs, higher than the expected 45,000, but this figure is not strong in itself. More importantly, October’s data was sharply revised downward to a loss of 105,000 jobs, far below the previous estimate of a 25,000 decline. The unemployment rate rose to 4.6%, a four-year high, significantly above the expected 4.4%.

In the context of the Fed halting balance sheet reduction and launching reserve management purchase programs, its overall policy tone is becoming more dovish. Considering Chair Powell’s term ends next year, markets are already betting that the Fed will cut rates twice again next year.

Short Squeeze Risk Could Trigger GBP Rebound

From the perspective of GBP/USD positioning, the current situation is quite delicate. Since investors have already priced in the rate cut expectations, asset managers’ short positions on the pound have reached multi-year highs. This extreme positioning means that if the BoE hints in its rate cut statement that the easing cycle may be nearing its end, or signals a policy stance different from market expectations, it could trigger a large-scale short squeeze, providing strong upward momentum for GBP/USD.

Technical Outlook: Bull-Bear Boundary Has Emerged, Breakout Will Decide Future Direction

Technical analysis on the daily chart indicates GBP/USD is at a critical decision point. Close attention should be paid to the 1.3455 level—if this level is broken convincingly, it could open the door for further gains. Conversely, if it falls below 1.3355, there is a risk of reversal driven by the upward trend. In the next 24 hours, the dual impact of November US CPI data and the BoE decision will be key factors in determining the short-term trend.