The Bank of England's December decision is imminent. Will GBP/USD see a "reversal"?

**Rate hike is essentially locked in; a 4-5 vote split may reoccur**

This Thursday (December 18), the Bank of England will announce its December interest rate decision. Market consensus points to a further 25 basis point cut to 3.75%, marking the fourth rate cut of the year and a new low in three years. According to market forecasts, the probability of a rate cut this time exceeds 90%, with at least one more adjustment expected before the end of April next year.

Notably, economists anticipate the voting result will continue the 4-5 split seen last month, reflecting clear disagreements within the Bank of England's decision-making body. However, considering the recent economic data from the UK showing signs of weakening, hawkish members may be showing signs of a shift in voting stance.

**Economic data reveals signals of slowdown, with inflation and employment both retreating**

UK GDP in October unexpectedly declined by 0.1% when released on December 12, failing to meet market expectations of positive growth and contracting for the second consecutive month. During the same period, the unemployment rate rose to its highest level since early 2021, further confirming economic softening.

Even more noteworthy, the UK Consumer Price Index (CPI) for November was announced on Wednesday (December 17) at a year-over-year increase of 3.2%, the smallest rise in nearly eight months, below the expected 3.5%. The core CPI, excluding food and energy, also showed weakness, with a 3.2% annual increase, below the forecasted 3.4%.

**Policy support and exchange rate reactions**

UK Chancellor Rishi Sunak unveiled a budget package on November 27, including measures such as freezing rail fares, extending fuel tax relief until next year, and easing household energy costs. It is expected to further reduce inflation by about 0.5 percentage points in Q2 next year, clearing policy hurdles for the BoE's rate cuts.

Following the inflation data release, GBP/USD experienced its most volatile single-day decline this month, briefly falling below 1.3311, hitting a one-week low; UK 10-year government bond yields also dropped over 7 basis points to 4.44%.

**US inflation to be tested; Federal Reserve's policy tone to remain dovish**

Later today, the US November Consumer Price Index will be released, with market expectations of a 3.1% annual increase, slightly higher than the previous month's 3%. Recent signals from Federal Reserve officials have been dovish; Vice Chair Williams stated that tariffs' inflation effects are mostly one-off shocks, and downward pressure on the labor market has increased in recent months.

From the labor market perspective, US non-farm payrolls added 64,000 jobs in November, better than the expected 45,000, but October saw a decline of 105,000 jobs, far exceeding the expected 25,000 drop. More concerning, the unemployment rate rose to 4.6% in November, above the market forecast of 4.4%, reaching a four-year high.

The clear softening in the labor market indicates latent risks for the US economy. Coupled with the Fed's halt on balance sheet reduction and the initiation of the Reserve Management Purchase (RMP) program, overall monetary policy has shifted toward easing. The market widely bets that the Fed will cut rates twice more next year, aligning with the political schedule of Fed Chair Powell's term ending next year and Trump’s expected appointment of a new chair in January 2026.

**Short positions on GBP hit decade-high, short squeeze risks emerge**

For GBP/USD traders, a key variable is brewing. As expectations of a rate cut have been priced in by the market, the size of GBP short positions held by asset managers has reached a multi-year high. If the BoE hints after this decision that the rate cut cycle is nearing its end, it could trigger a "very intense" short squeeze, providing strong upward momentum for GBP/USD.

**Technical key levels: a fine line between bulls and bears**

The daily chart shows GBP/USD at a critical juncture of bullish and bearish forces. A confirmed break above 1.3455 would open further upside space; a break below 1.3355 would warrant caution for a reversal of the upward momentum. The market is currently waiting for this key trigger point from the BoE decision.