When will the pound rebound? The central bank is about to cut interest rates, and market undercurrents are surging.

Weakening Economic Data, UK Bank of England’s December Decision Could Mark a Turning Point

This Thursday, the Bank of England will announce its December interest rate decision, which is likely to be a watershed moment for the pound. The market widely expects the BOE to cut the benchmark rate by 25 basis points to 3.75%, marking the fourth rate cut this year and the lowest level in three years. Based on market sentiment, the probability of the BOE taking action has exceeded 90%, and many analysts expect further moves before April next year.

Supporting the BOE’s potential action are recent weak economic data. UK GDP unexpectedly declined by 0.1% month-on-month in October, contrasting sharply with the expected 0.1% growth, marking two consecutive months of contraction. Meanwhile, the unemployment rate has risen to its highest level since early 2021, signaling a weakening labor market.

Inflation has also eased. The UK Consumer Price Index (CPI) for November rose by 3.2% year-on-year, the slowest increase in nearly eight months, falling below the market expectation of 3.5%. Core CPI was only 3.2%, comfortably below the expected 3.4%. After the release of these data, the GBP/USD experienced its largest single-day decline within a month, even touching around 1.3311 during the session, hitting a nearly one-week low; the UK 10-year government bond yield also fell more than 7 basis points to 4.44%.

The UK Treasury’s policy team has also created a dovish policy environment for the central bank. A series of measures announced by Chancellor Rishi Sunak at the end of November—including freezing rail fares, delaying fuel tax relief, and reducing household energy costs—are expected to further lower inflation by up to 0.5 percentage points in the second quarter of next year.

Fed’s Attitude Shift, Divergence in US and UK Policies Becomes Focus

In contrast, the Federal Reserve’s stance is also subtly changing. Fed officials like (John Williams) have adopted a more dovish tone, suggesting that tariffs’ impact on prices is a one-time effect, while downside risks to the labor market have intensified in recent months.

US employment data is indeed less optimistic. Non-farm payrolls in November increased by only 64,000, exceeding the market expectation of 45,000, but October’s data was concerning—non-farm employment decreased by 105,000, far surpassing the expected decline of 25,000. More notably, the US unemployment rate rose to 4.6% in November, above the expected 4.4%, reaching a four-year high.

The Fed has paused its balance sheet reduction and instead launched the Reserve Management Purchase (RMP) program, signaling a clear shift toward easing. Additionally, with Powell’s term ending next year, the market generally expects the Fed to cut rates twice in 2025.

Market Sentiment Reversal, GBP May Experience Unexpected Rise

All these factors create an interesting scenario for GBP/USD. Since investors have already priced in the expectation of a rate cut by the BOE, the current short positions held by asset managers have reached a decade-high. If the BOE signals that the rate cut cycle is near or ending, the market could quickly reverse, triggering a very sharp short covering, which would provide strong upward momentum for GBP/USD.

Technical Outlook: Key Resistance and Support Levels to Watch

From a technical perspective, GBP/USD daily chart shows a tug-of-war between bulls and bears. The key level to watch is 1.3455; a confirmed break above this could unleash further upside. On the downside, caution is advised around 1.3355—breaking this support could signal a reversal of the uptrend. Traders should closely monitor these critical levels in the current environment.