The Bank of England is on the verge of cutting interest rates; the GBP to RMB exchange rate may face turbulence

Signs of Economic Slowdown Emerge Frequently, the “Boot” of the Bank of England’s December Rate Cut Is About to Drop

The Bank of England’s interest rate decision on Thursday (December 18) will be a focal point for financial markets in the near term. According to market consensus, the BOE is very likely to announce a 25 basis point cut to 3.75%, marking its fourth rate cut since 2024 and the lowest level in three years. The probability of this rate cut, as assessed by market institutions, has exceeded 90%.

Recent UK economic data provide ample policy basis for the central bank’s rate cut actions. GDP unexpectedly contracted by 0.1% in October, which not only fell short of the market expectation of 0.1% growth but also signaled a second consecutive month of economic contraction. Meanwhile, the UK unemployment rate has risen to its highest level since early 2021, further reinforcing the view of economic pressure.

Signs of cooling inflation are also evident. The November CPI year-on-year increase was 3.2%, hitting an 8-month low, below the market expectation of 3.5%. Core CPI was also only 3.2%, below the expected 3.4%. Influenced by this data, the GBP/USD fell sharply, dropping over 0.8% to 1.3311 intraday, hitting a one-week low. The GBP to RMB exchange rate also faces re-pricing pressure related to this.

Internal Divisions Widen, but the Rate Cut Cycle Signal May Be a “Surprise”

It is noteworthy that this BOE meeting is expected to produce a 5-4 voting result for the second consecutive time, reflecting significant disagreements within the central bank’s management on policy direction. Although four hawkish members remain, considering the latest economic data, the market expects some members may change their stance.

If the BOE signals that the rate cut cycle is nearing its end after announcing a cut, it could trigger a “very intense” market reaction. Currently, asset management firms hold the largest GBP short positions in over a decade, meaning that if the central bank signals hawkishness, a chain reaction of forced long positions closing could provide upward momentum for GBP/USD, creating favorable conditions for GBP to RMB appreciation.

The UK fiscal budget announced on November 27 is also worth noting, including measures such as freezing railway fares, extending fuel tax relief, and lowering household energy bills. These policy measures are expected to further reduce inflation by 0.5 percentage points in the second quarter of next year.

US CPI Release Imminent, Federal Reserve Policy Tone Will Influence the Overall Situation

The US November CPI data will also be released today, with market expectations of a 3.1% annual growth rate, slightly higher than the previous 3%. It is worth noting that Federal Reserve officials generally consider tariff impacts on prices as one-off factors. Fed Vice Chair Williams recently signaled a dovish stance, emphasizing the short-term nature of tariff-driven inflation effects, while also pointing out that the US labor market has faced increased downside risks in recent months.

The latest US November non-farm payrolls increased by 64,000, exceeding the expected 45,000, but the significant downward revision of October data (from an expected increase of 25,000 to a decrease of 105,000) indicates labor market weakness. The November unemployment rate rose to 4.6%, higher than the expected 4.4% and reaching a four-year high.

This labor market weakness provides room for the Fed to further ease policy. The Fed has stopped shrinking its balance sheet and has started the Reserve Management Purchase (RMP) program, with the overall monetary policy stance clearly leaning toward easing. The market widely expects the Fed to cut rates twice more in 2025.

Technical Outlook Shows Mixed Signals, Key Levels Await Breakthrough

The GBP/USD daily chart shows that this currency pair is at a balance point between bullish and bearish forces. Investors should focus on two key technical levels: a successful break above 1.3455 could open up upside space; conversely, a break below 1.3355 might risk a reversal of the rally, and investors should stay alert.

Overall, the certainty of a BOE rate cut is high, and the short-term trend of GBP to RMB and other GBP cross rates will largely depend on the central bank’s subsequent policy guidance after the rate cut. The easing cycle of the Fed and the policy rhythm of the BOE are forming a new game pattern, with market volatility beginning to emerge.