The Bank of England is about to cut interest rates tonight, and the GBP rebound could be an unexpected surprise

Strong policy signals, rate cuts are already a market consensus

This Thursday (December 18), the Bank of England will announce its December interest rate decision, and there is almost no suspense in the market—cutting rates by 25 basis points to 3.75% is a certainty. This will be the fourth rate adjustment by the BOE this year and the first time in three years that rates have fallen to such a low level. The market generally estimates over a 90% probability of a rate cut, and institutions are already betting that the BOE will cut at least once more before April next year.

However, attention should be paid to the voting split. Economists expect this meeting to continue the 5-4 voting pattern from last month, reflecting genuine internal disagreements within the central bank about the pace of rate cuts. The hawkish camp holds four votes, but with the latest economic data released, this line of defense may loosen.

Economic data delivers results: recession signals flash

UK GDP for October was released on the 12th of this month, unexpectedly contracting by 0.1%, breaking the market expectation of flat growth. More concerning is that this is the second consecutive month of negative growth, indicating an unfavorable economic slowdown trend. Meanwhile, the UK unemployment rate surged to its highest level since early 2021, raising concerns about cooling in the labor market.

On the inflation front, good news also arrived—November CPI year-over-year growth slowed to 3.2%, hitting an 8-month low and well below the market expectation of 3.5%. Core CPI, excluding food and energy, also performed well, with a year-over-year increase of 3.2%, below the expected 3.4%. Once this data was released, the GBP/USD dropped sharply, with the daily decline reaching the largest in recent months, briefly falling below 1.3311. Treasury yields also fell more than 7 basis points to 4.44%.

Fiscal support cannot be ignored either. UK Chancellor Rishi Sunak announced a budget package on November 27 (including freezing railway fares, extending fuel tax relief, and lowering energy bills), which is expected to directly reduce inflation by 0.5 percentage points in the second quarter of next year. This undoubtedly paves the way for the BOE’s rate cut process.

FOMC stance remains ambiguous, market has different plans

Meanwhile, US economic data tell a different story. The upcoming November CPI is expected to rise to 3.1%, up from 3% previously. Although FOMC officials generally downplay tariff-driven inflation, considering it a one-time shock, “dove” officials like Williams have repeatedly signaled—downward pressure on the labor market is the real threat at present.

Data supports this: November US non-farm payrolls added 640,000 jobs, which seems impressive, but the previous October figure shrank by 105,000, raising doubts about such volatility. The unemployment rate rose to 4.6%, a four-year high, exceeding market expectations of 4.4%.

The Fed has paused its balance sheet reduction and instead launched the Reserve Management Purchase (RMP) program, shifting monetary policy toward easing. With Powell’s term ending next year and Trump potentially announcing a new chair in January 2026, markets are betting on at least two more rate cuts by the Fed next year.

The hidden currents behind the GBP§ rebound

The market has already digested the BOE’s rate cut, with asset management firms holding the largest short positions on GBP in over a decade. Once the BOE hints that the cycle is nearing its end after the rate cut, it could trigger an “extraordinarily intense” short squeeze, providing significant rebound momentum for GBP/USD.

Key levels become decisive points, bulls and bears clash here

From a technical perspective, the GBP/USD daily chart shows a critical battle between bulls and bears at key levels. If it effectively breaks above 1.3455, the upside could open a new chapter; conversely, if it falls below 1.3355, caution is needed to see if the upward momentum can be maintained. These two levels have become the recent “life and death lines,” and traders must keep a close eye on them.