GBP/USD reappears divergence at a critical moment; will the easing cycle signal trigger a short squeeze rally?

**Technical volatility is intense, with a clear delineation between bulls and bears**

The GBP/USD daily chart has recently fallen into a dilemma. The key resistance level is at 1.3455. If the price breaks above this level, the upward momentum will gain new strength; conversely, a break below 1.3355 could face a reversal risk. Currently, the price hovers between these two critical points, forming a subtle balance of power between bulls and bears.

**The Bank of England is on the verge of cutting rates, but internal disagreements disrupt the rhythm**

On Thursday (December 18), the Bank of England will announce its December interest rate decision. Market expectations of a 25 basis point cut to 3.75% exceed 90%, which would be the fourth rate cut this year and the lowest level in three years. However, economists predict a possible 5-4 split in the voting, indicating deep divisions within the BOE on policy direction.

In contrast, recent UK economic data provide strong support for a rate cut. The October GDP, released on December 12, unexpectedly contracted by 0.1%, breaking the market’s hopes of a modest 0.1% growth, marking the second consecutive month of contraction. The unemployment rate also rose to its highest since early 2021, further reflecting signs of economic slowdown.

**Cooling inflation clears policy hurdles**

On Wednesday (December 17), UK November CPI annual inflation rose to 3.2%, below market expectations of 3.5% and the smallest increase in eight months. Core CPI (excluding food and energy) also showed weakness, with an annual rate of only 3.2%, well below the expected 3.4%. After this data was released, GBP/USD plunged, falling over 0.8% intraday to 1.3311, hitting a one-week low; UK 10-year government bond yields declined more than 7 basis points to 4.44%.

The UK Chancellor Rishi Sunak’s budget announced on November 27 also cleared the way for a rate cut. Policies such as freezing rail fares, extending fuel tax relief, and reducing household energy bills are expected to bring inflation down by as much as 0.5 percentage points in the second quarter of next year.

**US CPI imminent, Fed’s stance turns dovish**

Later today, the US will release November CPI data, with market expectations of a 3.1% annual increase, slightly above the previous 3%. Fed officials have been signaling increasingly dovish views. “Fed’s three top officials,” including John Williams(, have pointed out that tariffs-induced inflation is essentially a one-time shock, and the downward pressure on the US labor market has significantly increased in recent months.

Weak signals from the US labor market should not be underestimated. The November non-farm payrolls, released on Tuesday (December 16), showed an increase of only 64,000 jobs, better than the expected 45,000, but October saw a decline of 105,000, far exceeding the expected 25,000 drop. The November unemployment rate rose to 4.6%, a four-year high, highlighting the labor market’s weakness.

The Fed has stopped balance sheet reduction and launched the RMP (Reserve Management Purchase) program, with an overall monetary policy tone clearly leaning towards easing. Markets widely expect the Fed to cut rates twice next year. With Chair Powell’s term ending next year, policy outlooks add uncertainty.

**The GBP bears are crowded, a reversal may trigger a surprising short squeeze**

It’s worth noting that investors have already fully priced in the BOE rate cut expectations, and the size of GBP short positions held by asset managers has reached multi-year highs. If the BOE signals that the rate cut cycle is nearing its end after this cut, it could trigger a “violent” short squeeze, providing strong upward momentum for GBP/USD.

The future direction of GBP/USD will depend directly on the wording of the BOE decision and subsequent guidance on policy paths. Investors should closely watch the key levels of 1.3455 and 1.3355, as they will determine the short-term bullish or bearish trend.