In the US, despite expectations of two more rate cuts by 2026 and a potential dovish shift in Fed leadership, the US Dollar struggles to gain momentum. This lack of follow-through from USD buyers supports the GBP/USD pair and keeps market players cautious in predicting deeper losses.
The Boe Interest Rate Decision
The BoE’s interest rate decision at its upcoming meeting could affect the British Pound’s performance either way, depending on whether a hawkish or dovish policy is adopted. The consensus for the next BoE interest rate decision is anticipated at 3.75%, down from the previous rate of 4%.
With GBP/USD trading in a tight range around 1.3370, we are holding back on any major moves. All eyes are on the Bank of England’s interest rate decision and the US CPI report, both due later today, December 18, 2025. The market is quiet as everyone waits for this crucial economic data before committing to a direction.
We are fully expecting the Bank of England to cut its main interest rate by a quarter-point, from 4.0% down to 3.75%. This move has been priced in for weeks, so the pound’s reaction will depend entirely on the bank’s future guidance. We will be listening for any hints about the pace of further cuts into the first quarter of 2026.
This expectation for a rate cut is supported by recent weak economic data here in the UK. November’s inflation reading came in softer than anticipated at 3.2%, a noticeable drop from the 3.6% we saw in October. This, combined with the unemployment rate climbing to 4.8% last quarter, its highest point since early 2021, gives the BoE plenty of reason to ease its policy.
The US Dollar and Inflation Data
On the other side of the pair, the US dollar isn’t showing much strength either, which is supporting the pound from falling further. We see clear signs of a softening US labor market, leading many to believe the Federal Reserve will have to make at least two more rate cuts in 2026. Looking back, we can see how the US economy has cooled since the more robust growth we saw in 2023 and 2024.
The upcoming US inflation data is a key piece of the puzzle, with expectations for the headline number to fall to 2.8%. Recent job reports have also supported a dovish Fed, as the last three Non-Farm Payroll reports have averaged just 90,000 new jobs, well below the 150,000 expected. A softer-than-expected inflation print today would almost certainly increase bets on Fed cuts, putting more pressure on the dollar.
Given the major event risk from both central banks, buying short-term volatility seems like a prudent strategy for the coming weeks. We are looking at options contracts, such as straddles expiring in January 2026, which would profit from a significant price swing in either direction. This allows us to position for a breakout without betting on whether it will be up or down.
For those considering a directional trade, the key will be the relative outlooks presented today. If the BoE signals an aggressive cutting cycle while US inflation remains stubborn, we would look to establish short positions in GBP/USD through put options. Conversely, a surprisingly dovish tone from US data could push the pair higher, making call options an attractive way to trade a potential dollar decline.
