Pound Sterling (GBP) experiences a cautious start to the Bank of England’s (BoE) monetary policy week against major currencies. This week, the British pound could face volatility and selling pressure due to upcoming economic data releases and strong expectations of a 25 basis points interest rate cut by BoE to 3.75%.
Economic Data Impact
Weak UK GDP figures have further impacted the pound as the week unfolds with key reports on employment data and Consumer Price Index (CPI), alongside the anticipated BoE rate reduction. Despite markets suggesting potential EUR/GBP growth next year, a substantial bearish sterling position could lead to a vigorous short squeeze if any positive developments occur.
During Monday’s Asian session, the GBP/USD pair is defensive but not overly bearish, maintaining above the 200-day Simple Moving Average (SMA) support. Spot prices are steady, trading around the 1.3360 level, showing little change for the day.
With the Bank of England set to announce its decision this week, we should be prepared for significant volatility in Sterling. The market is overwhelmingly expecting a rate cut to 3.75%, especially after recent Office for National Statistics data showed the UK economy grew by a meager 0.1% in the third quarter of 2025. This weak growth puts immense pressure on the Bank to act.
For traders anticipating the pound will fall, buying GBP put options or selling sterling futures contracts are direct ways to position for the expected rate cut. This view is supported by the latest Labour Force Survey, which showed the unemployment rate edging up to 4.5%, giving the BoE another reason to ease monetary policy. These positions would profit if GBP/USD breaks below its current support levels following the decision.
Potential Short Squeeze Risk
However, we must be cautious as a bearish sterling view is a very crowded trade right now. This creates a high risk of a “short squeeze,” where any positive surprise could cause a rapid price jump as short-sellers are forced to buy back their positions. For instance, if the upcoming Consumer Price Index data comes in above the recent 2.6% level, the Bank might hold rates steady, which would catch the market off guard.
Given this two-way risk, strategies that benefit from a large price move in either direction, such as a long straddle or strangle using options, could be prudent. We saw similar volatile reactions during the start of this easing cycle in late 2024, which followed the aggressive rate-hiking period of 2022-2023. These option strategies allow traders to capitalize on the upcoming data releases without having to perfectly predict the direction of the move.
On a technical level, the GBP/USD pair holding above its 200-day moving average around 1.3360 is critical. A firm break below this support level on a rate cut announcement would likely trigger further selling. Conversely, a bounce from this level on a hawkish surprise from the BoE could be the catalyst for the aforementioned short squeeze.
