The Bank of England's decision on Thursday is imminent—how will the signaling of a rate cut shake up GBP/USD?

**Weakening Inflation Opens the Door for a Rate Cut**

On Thursday (December 18), the UK’s central bank is set to announce its December interest rate decision, with market expectations quite clear—cutting by 25 basis points to 3.75%. This will be the fourth adjustment by the Bank of England this year and will mark the lowest level in nearly three years. According to market research, the probability of a rate cut has exceeded 90%, and the market generally expects another rate reduction before the end of April next year.

Notably, there remains significant disagreement within the Bank of England’s decision-making committee. Economists predict a voting split of 5-4, indicating clear divisions among policymakers. However, recent UK economic data may provide a turning point—both inflation and employment are cooling, which could lead some hawkish members to change their stance.

**Economic Data Confirms Recession Signs**

October UK GDP figures are concerning. Data released on December 12 showed that GDP contracted by 0.1% month-on-month, missing the market expectation of a 0.1% increase, and continuing a two-month downward trend. Weakness in the labor market further fuels recession fears—UK unemployment has risen to its highest level since early 2021.

Inflation data, on the other hand, is relatively optimistic. The Consumer Price Index (CPI) for November, released on Wednesday (December 17), showed a year-over-year increase of 3.2%, the lowest in nearly eight months, below the market forecast of 3.5%. Core CPI (excluding food and energy) also rose by 3.2%, beating expectations of 3.4%. Following this inflation report, GBP/USD came under pressure, with the largest single-day decline in a month, briefly falling below 1.3311, hitting a weekly low; the UK 10-year government bond yield also dropped over 7 basis points to 4.44%.

On the policy front, the budget announced at the end of November also lays the groundwork for a rate cut cycle. UK Chancellor Rishi Sunak’s measures—including freezing rail fares, delaying fuel tax reductions by a year, and lowering household energy bills—are expected to reduce inflation by as much as 0.5 percentage points in the second quarter of next year.

**US Economic Soft Landing Expectations Impact the Dollar Outlook**

Today will also see the release of the US November CPI, with market expectations of a 3.1% annual increase, slightly up from 3% previously. Federal Reserve officials have been relatively dovish in their assessments—"Fed's third-in-command" John Williams recently signaled a dovish stance, emphasizing that the inflationary effects caused by tariffs are mainly one-time shocks, and that downside risks to the labor market have significantly increased in recent months.

The US labor market has shown clear signs of softening. The November non-farm payrolls report showed an increase of 64,000 jobs, above the expected 45,000, but this cannot hide the downward trend from October, which saw a loss of 105,000 jobs (far exceeding the expected decline of 25,000). The unemployment rate rose to 4.6%, the highest in four years, surpassing the market expectation of 4.4%.

The Fed’s policy stance is also leaning toward easing—officials have stopped balance sheet reduction and launched the Reserve Management Purchase (RMP) program. Considering that Chair Powell’s term ends next year, the Trump administration may announce a new Fed chair appointment in early 2026. The market widely expects the Fed to cut rates twice more next year.

**GBP Shorts May Face Reversal Risks**

For GBP/USD, the current situation is quite delicate. Since investors have already priced in the expectation of a rate cut by the Bank of England, the size of GBP short positions held by asset managers has reached its highest level in over a decade. Once the BOE signals that the cycle is nearing its end after a rate cut, the market could see an "extremely sharp" short covering, potentially driving GBP/USD higher.

**Technical Outlook: Stalemate with Key Levels Emerging**

On the daily chart, GBP/USD is at a critical juncture of bullish and bearish forces. Traders should focus on two key levels: a clear break above 1.3455 could signal an upward trend continuation; conversely, a drop below 1.3355 warrants caution for a reversal of the rally. The upcoming BOE decision and US CPI will be crucial catalysts in determining the direction.