The Bank of England's policy shift is imminent. Can GBP/USD break through?

A 25 Basis Point Rate Cut Almost Certain, Internal Disagreements Still Exist

On Thursday, the Bank of England will announce its December interest rate decision, and market confidence in a rate cut has become quite high—over 90% probability of a cut. Industry consensus expects the BOE to lower the benchmark rate by 25 basis points to 3.75%, marking the fourth rate cut this year and the lowest level in three years.

It is worth noting that the stance within the decision-making committee is not entirely unified. Economists predict that this meeting may once again see a 5-4 voting split, with some of the four hawkish members possibly changing their stance to support a rate cut. This internal disagreement reflects subtle shifts in monetary policy direction.

Weakening Economic Fundamentals Provide Support for Policy Adjustment

Recent UK data have provided the central bank with reasons to cut rates. On December 12, data showed that October GDP unexpectedly declined by 0.1% month-on-month, failing to meet market expectations of growth, marking the second consecutive month of negative growth signals. Meanwhile, the UK unemployment rate has risen to its highest level since early 2021, indicating a clear weakening in the labor market.

Improvements in inflation are more evident. The Consumer Price Index (CPI) for November, released on Wednesday, increased by 3.2% year-on-year, the smallest rise in eight months and below market expectations of 3.5%. Core CPI, excluding food and energy, also grew by 3.2%, below the expected 3.4%. The market’s reaction to a potential rate cut by the BOE has been quite sensitive—GBP/USD plunged over 0.8% intraday, briefly touching a weekly low of 1.3311; UK 10-year government bond yields also fell more than 7 basis points to 4.44%.

The fiscal plan announced at the end of November also cleared obstacles for policy adjustment. The package of measures—freezing railway fares, extending fuel tax relief, reducing household energy costs, among others—is expected to further lower inflation by at least 0.5 percentage points in the second quarter of next year.

Weak US Employment Data and the Dovish Shift by the Federal Reserve

While markets focus on the BOE, they should not overlook developments in the US. November non-farm payrolls were disappointing, with 640,000 new jobs added—above the expected 450,000—but revised October data plunged to a negative 105,000, far below the previous forecast of a 25,000 decline. This volatility suggests pressure on the US labor market.

The unemployment rate in November rose to 4.6%, a four-year high and above the market expectation of 4.4%. This weakening resilience in the labor market has attracted the Fed’s attention.

Signals from Federal Reserve officials have also become more dovish. Williams, often called the “Number Three” of the Fed, recently stated that tariffs’ impact on inflation is a one-time effect, and the risks of employment decline have increased in recent months. The Fed has stopped shrinking its balance sheet and launched the RMP (Reserve Management Purchase) program, indicating an overall tilt toward easing. Considering Chair Powell’s term ends next year, markets widely expect the Fed to cut interest rates twice next year.

GBP/USD “Short Squeeze” Risks and Technical Outlook

Currently, GBP short positions are at their highest level in over a decade, reflecting that investors have already priced in the expectation of a rate cut by the BOE. Once the BOE signals that the rate cut cycle is nearing its end, the market could see a “very intense” short squeeze, potentially providing strong upward momentum for GBP/USD.

On the technical side, the GBP/USD is in a tug-of-war between bulls and bears. The daily chart highlights two key levels to watch: 1.3455 as an upside breakout point—if broken convincingly, the rally could gain momentum; 1.3355 as a downside alert—if breached, a reversal of the upward trend should be feared.

Global currency markets are undergoing re-pricing amid central bank policy adjustments. Non-mainstream currency pairs like the Shekel against the RMB are also experiencing expected volatility during this policy shift, and GBP/USD’s movement is similarly at a crossroads of policy turning points.