Is the Bank of England's interest rate cut a done deal? GBP/USD may welcome a "surprise"!

Investment Insights - The Bank of England's interest rate decision is approaching, with cooling inflation paving the way for rate cuts. On Thursday (December 18), the market will welcome the Bank of England's December interest rate decision, with the market widely expecting the Bank of England to announce a 25 basis point rate cut to 3.75%, marking the fourth rate cut this year and the lowest level in three years. The market believes there is over a 90% chance of a rate cut by the Bank of England tonight and predicts another rate cut before the end of April next year. Currently, the GBP/USD is consolidating around 1.3350. It is worth noting that economists expect the meeting to see a 5 to 4 voting result for the second consecutive time, indicating significant internal divisions within the Bank of England. However, considering the recent economic data released in the UK showing a cooling in both inflation and employment, there is a possibility that some of the four hawkish members may switch sides. Specifically, the UK's October GDP, announced on December 12, unexpectedly contracted by 0.1%, lower than the market expectation of a 0.1% growth, marking a second consecutive month of contraction. Meanwhile, the UK's unemployment rate rose to its highest level since early 2021, further highlighting signs of economic slowdown. On the other hand, on Wednesday (December 17), the UK's November Consumer Price Index (CPI) rose by 3.2% year-on-year, the smallest increase in eight months, while the market expected a 3.5% rise; the core CPI, excluding food and energy, also rose by 3.2% year-on-year, below the expected 3.4%. Following the release of the inflation data, the GBP/USD recorded its largest single-day drop in a month, falling over 0.8% to 1.3311 at one point, hitting a one-week low; the yield on the UK's 10-year government bonds fell by more than 7 basis points to 4.44%. Furthermore, the budget announced on November 27 also cleared obstacles for the Bank of England to restart rate cuts. The policy package from UK Chancellor of the Exchequer Rachel Reeves (including freezing railway fares, extending fuel tax relief for another year, and reducing household energy bills) is expected to lower the inflation rate by up to 0.5 percentage points in the second quarter of next year. U.S. CPI is about to be announced, and expectations for a Federal Reserve rate cut may be stronger. It is noteworthy that the U.S. November CPI will also be released today, with the market expecting a year-on-year increase of 3.1%, slightly higher than the previous value of 3%. It should be noted that the Federal Reserve currently generally believes that the impact of tariffs on inflation is one-time. John Williams, known as the "third-in-command" of the Federal Reserve, has released dovish signals, stating that the inflation impact caused by tariffs is largely one-time, while the downside risks facing the job market have intensified in recent months. On Tuesday (December 16), the U.S. November seasonally adjusted non-farm payrolls recorded an increase of 64,000, higher than the market expectation of 45,000. The October non-farm payrolls decreased by 105,000, far exceeding the expected decline of 25,000. Notably, the U.S. November unemployment rate rose to 4.6%, higher than the market expectation of 4.4%, reaching a four-year high The weakness in the labor market indicates certain risks for the U.S. economy. Coupled with the Federal Reserve's halt in balance sheet reduction and the initiation of the Reserve Management Purchase (RMP) plan, the overall monetary policy tone of the Federal Reserve is leaning towards easing. Additionally, Federal Reserve Chairman Jerome Powell's term will end next year, and Trump may announce the new Federal Reserve Chairman candidate in January 2026. The market is betting that the Federal Reserve will cut interest rates two more times next year. For GBP/USD, given that investors have already priced in expectations for a Bank of England rate cut, the scale of short positions held by asset management companies in GBP is the largest in over a decade. If the Bank of England signals that the rate cut cycle is nearing its end after a rate cut, it could lead to a "very violent" short squeeze and provide further upward momentum for GBP/USD. GBP/USD Technical Analysis: A long-short decision is imminent, focusing on levels 1.3455 and 1.3355. GBP/USD Daily Chart: Image source: tradingview The daily chart shows that GBP/USD is facing a long-short decision, with two key levels to focus on. If it effectively breaks above 1.3455, the upside potential is expected to open up; if it falls below 1.3355, caution should be exercised for a reversal of the upward trend