The Bank of England is likely to cut the interest rate by 25 basis points, bringing it down to 3.75%. This decision may pass with a close vote of 5-4, but there’s also a chance of it being 6-3. Recent inflation data from November showed a significant drop in food prices, making further rate cuts more likely soon.
The British pound currently faces short-term risks because of its speculative positioning. According to the CFTC, asset managers are keeping a short position in the pound at 38% of open interest, which is among the lowest levels for sterling in five years.
Possible Impact on Euro Pound
Following the Bank of England’s rate cut, EUR/GBP could rise to around 0.8820/8840. However, we might see a pullback to 0.8750 shortly after, as the European Central Bank will hold its own events soon after the BoE announcement.
We expect the Bank of England to reduce interest rates by 25 basis points to 3.75% at its meeting today, December 18, 2025. This anticipated cut follows a positive surprise in the November inflation report from the Office for National Statistics, which saw the headline CPI drop to 2.1%. If the voting split is more dovish than expected (like a 6-3 vote), it could negatively impact the pound.
This suggests it might be a good time to short the pound, but there’s a complicating factor. The latest CFTC data shows that speculative positioning is already heavily leaning against sterling, with asset managers holding net short positions at 38% of open interest. This is the most bearish sentiment we’ve seen in years.
Derivative Trading Strategy
This extreme positioning reminds us of late 2020 during the uncertain final stages of Brexit trade negotiations. When too many traders are on one side, unexpected news can cause a sudden reversal. This indicates there could be highly significant volatility around the announcement.
For those trading derivatives, this crowded positioning makes options strategies that benefit from large price swings attractive, rather than those predicting a specific direction. For example, a short-dated straddle on GBP/USD could take advantage of increased volatility if the BoE’s statement causes a sharp market move. This would also hedge against the risk of a short squeeze if the pound unexpectedly rises.
The immediate strategy could suggest a rise in EUR/GBP towards the 0.8820 level after a dovish announcement from the BoE. However, the European Central Bank will have its policy meeting just a few hours later. Given that Eurozone inflation is currently sticking at 2.8% for November, a hawkish stance from the ECB could reverse any initial weakness of sterling against the euro.
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