The Bank of England's interest rate cut is imminent, causing a change in the GBP/USD and GBP/RMB exchange rate trends

Multiple positive factors converge, UK Bank of England’s December rate cut probability exceeds 90%

On Thursday (December 18), the Bank of England will announce its December interest rate decision, with market consensus strongly favoring a rate cut. According to market data, the probability that the BOE will cut the federal funds rate by 25 basis points to 3.75% exceeds 90%, marking the fourth rate cut this year and the lowest level in nearly three years.

The main driver behind this rate cut is a significant shift in the UK economy. Data released on December 12 showed that the UK’s October GDP contracted by 0.1% month-on-month, not only falling short of the market expectation of 0.1% growth but also marking two consecutive months of decline. Simultaneously released unemployment data is also concerning—the UK’s unemployment rate has risen to its highest point since early 2021, fully reflecting a weakening of economic growth momentum.

Good news from the inflation front further supports the rate cut expectations. The UK Consumer Price Index (CPI) for November, released on Wednesday, showed an annual increase of 3.2%, the lowest in eight months and well below the market forecast of 3.5%. The core CPI, excluding food and energy, also performed well, with an annual increase of 3.2%, below the expected 3.4%. After these data were released, GBP/USD hit its largest single-day decline of the month, falling over 0.8% intra-day to 1.3311 and hitting a one-week low; the UK 10-year government bond yield also fell more than 7 basis points to 4.44%.

Internal divergence emerges, signaling a wait-and-see approach for the rate cut cycle

It is noteworthy that market forecasts suggest the BOE may once again be divided 5-4 in its voting, reflecting clear disagreements within the decision-making body on policy direction. Although hawkish members are in the minority, recent weak UK economic data may prompt some hawks to change their stance.

UK Chancellor Rishi Sunak’s budget plan announced on November 27 also favors the central bank’s move to cut rates. The plan includes measures such as freezing rail fares, extending fuel tax reductions, and lowering household energy bills, which are expected to reduce inflation by up to 0.5 percentage points in the second quarter of next year.

The market generally expects the BOE to implement at least one more rate cut before the end of April next year. Once the BOE signals that the rate cut cycle is nearing its end, it could trigger a sharp reaction from investors, providing upward momentum for GBP/USD and GBP against RMB.

US CPI data due, dovish signals from Fed emerge

Today will also see the release of US November CPI data, with market expectations at an annual rate of 3.1%, slightly higher than the previous 3%. Federal Reserve officials generally believe that tariffs’ impact on inflation is a one-time shock. Fed Vice Chair Williams has sent a clear dovish signal, stating that the inflation effect of tariffs is mostly temporary, while downside risks to the labor market have recently increased.

US labor market data also shows signs of weakness. The November non-farm payrolls released on December 16 increased by 64,000 jobs, exceeding the expected 45,000, but October data showed a decline of 105,000 jobs, far surpassing the expected 25,000 decline. More notably, the November unemployment rate rose to 4.6%, a four-year high, above the market expectation of 4.4%.

Against this backdrop, the Fed has halted its balance sheet reduction and shifted to a reserve management purchase plan (RMP), indicating a clear shift toward easing monetary policy. Markets are betting that the Fed will cut rates twice again next year, which also supports the strength of GBP against USD.

Technical turning point imminent, GBP/USD faces directional decision

From a technical perspective, the GBP/USD daily chart shows a divergence between bulls and bears. Two key levels to watch are: if the price can effectively break above 1.3455, the upside potential may open; conversely, if it falls below 1.3355, the upward trend could reverse.

Considering investors have already priced in the BOE’s rate cut expectations, asset managers currently hold the largest short positions on GBP in over a decade. Once the BOE hints that the rate cut cycle is nearing its end, a strong short covering could be triggered, further strengthening GBP/USD and GBP against RMB.