The night before the Bank of England decision, GBP/USD faces a critical breakout point

Rate Cut Imminent, Market Sentiment Has Reacted Early

The Bank of England’s interest rate decision on December 18th is highly anticipated. According to market consensus, the Bank of England is over 90% likely to announce a 25 bps rate cut to 3.75%, marking the fourth rate cut this year and hitting a three-year low. The market further expects the Bank of England to implement at least one more rate cut before the end of April next year.

Notably, internal disagreements within the Bank of England have intensified. Economists generally expect a 5-4 voting result in this meeting, indicating a split between hawkish and dovish factions. However, recent UK economic data are changing market perceptions of the Bank of England’s stance.

Economic Data Turning Point Has Appeared, Hawkish Position May Waver

The UK economy shows clear signs of slowdown. The October GDP data released on December 12th unexpectedly contracted by 0.1%, marking the second consecutive month of negative growth. Meanwhile, the unemployment rate rose to its highest level since early 2021, further confirming economic softening.

Inflation data, however, provides support for decision-making. The November Consumer Price Index (CPI) released on December 17th increased by 3.2% year-over-year, the smallest rise in eight months and below market expectations of 3.5%. Core CPI also underperformed, with a 3.2% annual rate versus an expected 3.4%. This dovish signal immediately impacted the forex market—GBP/USD experienced its largest single-day decline in a month, falling below 1.3311 intraday and hitting a new weekly low. The bond market also responded, with the UK 10-year government bond yield dropping by 7 bps to 4.44%.

The UK Treasury’s policy package also clears obstacles for a rate cut. The budget announced on November 27th includes measures (such as freezing rail fares, extending fuel tax relief, and reducing household energy costs) that are expected to further lower inflation by about 0.5 percentage points in the second quarter of next year.

Fed’s Attitude Shift, Coupled Effects Cannot Be Ignored

The policy stance of the US is also changing global liquidity expectations. In November, US non-farm payrolls increased by 64,000, higher than the expected 45,000, but the October data was significantly revised downward by 105,000, far exceeding expectations. The November unemployment rate rose to 4.6%, a four-year high, highlighting the fragility of the labor market.

Federal Reserve officials have signaled a dovish stance. Williams, known as the “Fed’s third-in-command,” stated that the inflation impact from tariffs is one-off, and downside risks to employment have increased in recent months. Coupled with the Fed’s halt to balance sheet reduction and the initiation of the Reserve Management Purchase (RMP) plan, the overall monetary policy tone has shifted toward easing. Markets widely expect the Fed to cut rates twice more next year.

GBP Trend Analysis: Short Squeeze Opportunities and Key Technical Levels

For GBP/USD investors, a key phenomenon to watch is that short positions held by asset management firms have reached their largest scale in over a decade. This indicates that investors have fully priced in a rate cut by the Bank of England. Once the BoE hints that the cycle is nearing its end after a rate cut, a “very intense” short squeeze could be triggered, providing strong upward momentum for GBP/USD.

From a technical perspective, the daily chart of GBP/USD shows a standoff between bulls and bears. Two key support/resistance levels to monitor are: 1.3455 as a breakout point above which the upside could open; and 1.3355 as support below which a reversal in the uptrend may be signaled.