Inflation cooling chain activated, how did the pound become the "chip" for the central bank's interest rate cut?

Data Release Signals: UK Economy Slowing Down Unlocks Rate Cuts

London time Thursday (December 18), the Bank of England will announce its December interest rate decision. According to widespread market consensus, there is over a 90% probability that the BoE will cut rates by 25 basis points to 3.75%, marking the fourth cut since 2024 and the lowest rate level in three years. Many analysts expect the BoE to initiate another rate cut cycle before April next year.

The core logic driving this judgment is the recent intensive release of economic data over the past week. On December 12, the UK’s October GDP data surprised—contracting by 0.1% month-on-month, contrasting with the market expectation of a 0.1% growth, indicating signs of recession for the second consecutive month. Meanwhile, the UK unemployment rate surged to a new high since early 2021, further confirming the weakening economic growth momentum.

More critically, the November CPI data released on Wednesday (December 17) broke market inflation concerns. Year-over-year, the overall CPI rose to 3.2%, the smallest increase in eight months, much milder than the expected 3.5%; core CPI excluding food and energy also reached 3.2%, below the forecast of 3.4%. Following the inflation data, the GBP/USD immediately plunged, with a daily drop of over 0.8% to 1.3311, hitting a near one-week low. Correspondingly, the UK 10-year government bond yield fell more than 7 basis points to 4.44%.

Policy Support: Fiscal Stimulus Eases Inflation Pressure

The UK Treasury’s budget announced at the end of November further cleared obstacles for the central bank’s rate cut path. Chancellor Rees’s policy package—including freezing railway fares, extending fuel tax relief, and reducing household energy costs—is expected to lower inflation by up to 0.5 percentage points by Q2 next year. This indicates a high degree of coordination between targeted fiscal support and the monetary policy’s easing direction.

Dissent Within the Central Bank Persists, but Signs of Shift Grow Stronger

It is noteworthy that economists expect the voting at the meeting to again be split 5-4, reflecting genuine disagreements within the BoE decision-making body on the pace of rate cuts. The hawkish camp has generally been cautious about premature rate cuts, but considering the latest economic data being sufficiently “hard,” some hawkish members may change stance and support easing.

US Inflation Data Approaching, Global Central Bank Policies Diverge Further

Meanwhile, overseas markets are also approaching a key juncture. In the US, the November CPI data will be released soon, with market expectations of a 3.1% annual growth rate, slightly higher than the previous 3%. Notably, Fed officials generally consider tariff-driven inflation as a one-off shock. Williams, often called the “Number Three” of the Fed, recently signaled a dovish stance, emphasizing that tariff inflation is temporary, while the downside risks to the US labor market have increased in recent months.

On the data front, the November non-farm payrolls released on December 16 showed an increase of 64,000 jobs, above the expected 45,000, but this cannot hide the bleak October data—down 105,000 month-on-month, far exceeding the expected 25,000 decline. The latest November unemployment rate rose to 4.6%, above the forecast of 4.4%, hitting a four-year high, with labor market fatigue becoming more apparent.

The Fed has stopped shrinking its balance sheet and launched the Reserve Management Purchase (RMP) program, with the overall monetary policy tone leaning towards easing. Considering Powell’s term expiring next year and Trump’s announcement of a new chair candidate in January 2026, markets widely expect the Fed to cut rates two more times next year.

How Will the Pound Break Through? Short Covering Rally May Unfold

For GBP/USD, the current situation is quite delicate. Investors have already priced in the BoE’s rate cut pace, with asset managers holding the highest short positions on the pound in over a decade. Once the BoE signals that the rate cut cycle is nearing its end, a very intense short covering rally could emerge, providing strong upward support for GBP/USD.

This divergence in global monetary policies will also indirectly influence the RMB/GBP exchange rate—when the pound appreciates against the dollar and the BoE’s rate cut cycle narrows, there is room for the RMB/GBP exchange rate to adjust.

Technical Outlook: Key Levels Determine Bullish or Bearish Direction

The daily chart shows GBP/USD at a crossroads. Two key levels need close monitoring: if it effectively breaks above 1.3455, the upside space may open; conversely, if it falls below 1.3355, caution is needed for a potential reversal of the rally.