The Bank of England's rate cut is imminent, and the GBP may be brewing an appreciation opportunity

**Economic signals open the door for the central bank to cut rates**

This Thursday (December 18), the Bank of England will announce its December interest rate decision, with the market already prepared for a fourth rate cut. Traders widely believe the BOE will lower the benchmark rate to 3.75%, the lowest in three years. Over 90% of market participants are betting that a rate cut will be finalized, with another easing cycle expected before April next year.

The cooling of UK economic data provides strong support for a rate cut. The Q3 GDP report released on December 12 was surprising—October's month-on-month contraction of 0.1% not only fell below market expectations of flat growth but also continued a two-month streak of negative growth. Unemployment data also came under pressure, with the unemployment rate rising to its highest since early 2021, further confirming signs of economic momentum slowing.

The latest inflation data further strengthens the case for a rate cut. The November CPI annual increase fell to 3.2%, a new 8-month low, well below the market forecast of 3.5%; core CPI excluding food and energy also showed moderate growth, rising only 3.2%. After this data was released, the GBP/USD dropped sharply, falling over 0.8% in a single day, briefly touching 1.3311 and hitting a weekly low; the 10-year UK bond yield also declined by more than 7 basis points to 4.44%.

The budget also promotes policy easing. Measures by the UK Treasury—including freezing transportation fares, extending fuel tax relief, and reducing household energy costs—are expected to further lower inflation by 0.5 percentage points in the second quarter of next year.

**Federal Reserve stance influences global central bank expectations**

It is worth noting that the US November CPI data will be released soon, with market expectations at 3.1% year-over-year, a slight increase from 3% the previous month. However, Fed officials have reached a consensus—that tariff-related price pressures are a one-time shock. Fed Vice Chair Williams has sent a clear dovish signal, indicating that downside risks to the labor market have increased in recent months, and that the impact of tariff-driven inflation is more temporary.

US labor data remains volatile. In November, non-farm payrolls increased by 64,000, surpassing the expected 45,000, but last month’s figure was sharply revised downward to a decrease of 105,000. The unemployment rate rose to 4.6%, the highest in four years. This labor market weakness casts a shadow over economic prospects, prompting the Fed to initiate a reserve management purchase plan based on stopping balance sheet reduction, with a clear easing bias. Additionally, with the Fed chair’s term ending next year, markets expect the Fed to cut rates twice more next year.

**GBP appreciation space is brewing amid a game of expectations**

The GBP/USD market positioning has reached a critical point. As investors have already priced in the expectation of a rate cut by the BOE, large asset management firms hold record short positions on GBP not seen in over a decade. The key is that once the BOE signals that the rate cut cycle is nearing its end, these short positions will face significant unwinding pressure, potentially driving a strong bullish move in GBP.

**Technical outlook points to a battle between bulls and bears**

The daily chart of GBP/USD shows the price at a crucial crossroads. Traders should focus on two strategic levels: a sustained move above 1.3455 could gradually open up upside potential; conversely, a break below 1.3355 might reverse the rally, requiring caution against downside risks. This battle between bulls and bears will determine the pace and magnitude of GBP’s appreciation.