The Bank of England is expected to lower the interest rate by 25 basis points to 3.75%. This dovish move might be decided by a narrow 5-4 vote, though there is a possibility of a 6-3 vote. Recent weak inflation data from November, including a notable drop in food prices, has made further cuts more probable in the near future.
Sterling faces short-term downside risks due to its current speculative positioning. Data from the CFTC indicates that asset managers are maintaining a short position in sterling at 38% of open interest. This level matches some of the lowest sterling positioning seen in the last five years.
Potential Euro Pound Impact
The possibility exists for EUR/GBP to spike to the 0.8820/8840 area following the BoE rate cut. However, there could be a subsequent pullback to 0.8750, coinciding with the European Central Bank’s events occurring shortly after the BoE announcement.
We are expecting the Bank of England to cut interest rates by 25 basis points to 3.75% at its meeting today, December 18, 2025. This move is largely anticipated following a pleasant surprise in the November inflation report from the Office for National Statistics, which showed headline CPI falling to 2.1%. The risk is that the vote split is more dovish than the market expects, perhaps 6-3 in favour of a cut, which would be negative for sterling.
This sounds like a clear signal to short the pound, but there is a major problem with that view. The latest CFTC data shows that speculative positioning is already substantially underweight sterling, with net short positions held by asset managers reaching 38% of open interest. These are the most bearish levels we have seen in years.
Derivative Trading Strategy
Such stretched positioning is reminiscent of the sentiment we saw in late 2020 amid the final, uncertain stages of Brexit trade deal negotiations. When everyone is already on one side of the trade, it creates the risk of a sharp reversal on any surprising news. This suggests a potential for significant volatility around the announcement.
For derivative traders, this crowded positioning increases the appeal of options strategies that profit from a large price swing rather than a specific direction. A short-dated straddle on GBP/USD, for instance, could capture a spike in volatility if the BoE’s statement triggers a sharp move. This would protect against the risk of a short squeeze where the pound rallies unexpectedly.
The immediate game plan could involve a spike in EUR/GBP toward the 0.8820 level on a dovish BoE announcement. However, the European Central Bank has its own policy meeting just a few hours later. Given that Eurozone inflation remains stickier, recently reported at 2.8% for November, a hawkish hold from the ECB could quickly reverse any initial sterling weakness against the euro.
