The Bank of England may initiate a rate cut cycle tonight, with the pound facing multiple variable shocks

Inflation Cooling + Softening Employment, Central Bank Rate Cut on the Horizon

This Thursday (December 18), the Bank of England will announce its December interest rate decision, with market consensus pointing to a 25 basis point cut to 3.75%—this will be the fourth rate cut by the BoE this year and the lowest in three years. Over 90% of market participants are betting on a rate cut to materialize, with most views suggesting the BoE still has room for further cuts before the end of April next year.

The main driver pushing the BoE toward easing stems from weakening economic fundamentals. Data released on December 12 showed UK GDP unexpectedly contracted by 0.1% month-on-month in October, contrasting with market expectations of growth, marking the second consecutive month of decline. Meanwhile, the unemployment rate rose to its highest level since early 2021, indicating clear signs of cooling in the employment market.

More critically, inflation has shown signs of improvement. On Wednesday (December 17), the UK November CPI annual rate rose to 3.2%, the lowest in eight months, below market expectations of 3.5%; core CPI also underperformed, at 3.2% versus the expected 3.4%. Following the inflation data release, the GBP/USD dropped sharply, hitting a one-month low intraday at 1.3311, breaking below a one-week support level. Simultaneously, the UK 10-year government bond yield fell over 7 basis points to 4.44%.

The budget announced by the UK Treasury at the end of November further cleared policy obstacles for rate cuts. The package of measures (including freezing rail fares, extending fuel tax relief, reducing household energy bills, etc.) is expected to lower inflation by up to 50 basis points in the second quarter of next year.

Notably, economists widely expect this meeting to continue the 5-4 voting pattern from last month, reflecting ongoing hawk-dove disagreements within the BoE. However, given the degree of economic data weakening, some hawkish members may shift their stance.

Federal Reserve Policy Stance as a Variable, Doubts Remain Over USD Strength

In contrast to the potential easing by the BoE, the Fed’s policy direction is also closely watched. This Thursday, US November CPI data will be released, with market expectations of a 3.1% annual increase, slightly higher than the previous 3%.

There is divergence within the Fed regarding inflation outlook. Williams, often referred to as the “Number Three” of the Fed, recently expressed dovish views, suggesting that tariff-induced price increases are a one-time shock, and that downward pressure on employment has intensified in recent months. This indicates rising concerns within the Fed about the economic outlook.

The latest employment data also confirms these concerns. Non-farm payrolls increased by 64,000 in November, higher than the expected 45,000, but October’s figure was sharply revised down to a decline of 105,000 (from an initial estimate of a 25,000 decrease), creating a stark contrast. The unemployment rate rose to 4.6%, a four-year high, well above the expected 4.4%. Signs of a weakening labor market are becoming increasingly evident.

The Fed has halted its balance sheet reduction and instead launched the Reserve Management Purchase (RMP) program, signaling clear easing intentions. Considering Chair Powell’s term is set to end next year, market expectations are that the Fed may cut rates about two more times before a new leadership team takes over.

Trading Mechanics Behind the Pound’s Pressure and Exchange Rate Outlook

The GBP/USD currently faces conflicting technical and fundamental signals. On one hand, investors have already priced in the likelihood of a rate cut by the BoE, with large asset managers holding GBP short positions at their highest levels in over a decade—implying limited downside potential. Once the BoE signals that the rate cut cycle is nearing its end, the market could face a “very intense” short covering, providing upward momentum for GBP/USD.

From the perspective of converting GBP to RMB, a weaker GBP means GBP assets are relatively cheaper when priced in RMB. However, if the BoE’s rate cut pace outstrips China’s monetary policy adjustments, the long-term downtrend of GBP relative to RMB may persist. This offers a new dimension for cross-border capital allocation.

Technical Analysis: The Increasing Clarity of the Bull-Bear Divide

The GBP/USD daily chart is at a decisive moment. Technical analysis shows that 1.3455 is a key resistance level; a successful break above this level could open the door to an upward trend. Conversely, if it falls below the support at 1.3355, traders should be alert to a potential reversal of the rally.

The market is at a critical juncture of bullish and bearish decision-making, with the BoE’s rate decision serving as a major catalyst for the exchange rate direction.