HSBC looks at how the recent interest rate cut by the Bank of England (BoE) affects the British pound. They believe that the BoE’s easing approach could cause the GBP to fall behind currencies like the Australian (AUD) and New Zealand (NZD) dollars, which are likely to see rate increases.
On December 18, the BoE lowered its policy rate by 25 basis points to 3.75%. This action marks the sixth cut in the current easing cycle. Even though the rate dropped, the tone of the meeting was assertive, suggesting that future rate cuts may be up for more discussion.
Future Rate Cut Expectations
Looking ahead to 2026, further rate cuts are expected, making the GBP likely to struggle against other G10 currencies. Currencies such as the AUD and NZD are already at a neutral rate or are expected to increase rates.
Last week, the Bank of England cut its rate to 3.75%, the sixth in this cycle. This creates a noticeable difference compared to other central banks in Australia and New Zealand, where tightening policies are expected instead.
This difference stems from recent economic data, providing confidence in this trend. As of November 2025, the UK’s inflation rate fell to 2.1%, supporting the BoE’s cuts. In contrast, inflation in Australia and New Zealand remained high, above 4.5%.
Given this outlook, we believe a key strategy is to prepare for further weakness in the pound against the Aussie and Kiwi dollars. This could include selling GBP/AUD and GBP/NZD futures contracts. The growing interest rate difference is likely to push these currency pairs lower as we move into the new year.
Historical Model of Policy Divergence
We’ve seen similar trends before, like the strong U.S. dollar from 2014 to 2016, when the Federal Reserve hinted at tightening while the ECB and the Bank of Japan were easing. This historical divergence can serve as a model for what could happen with the pound now. Such trends can be significant and last for several months.
The BoE’s remark that future easing is a “closer call” brings some uncertainty, which we need to handle. For options traders, this means implied volatility on GBP pairs may remain high, making strategies like buying puts on the pound potentially costly but effective. We’ll need to keep an eye on this uncertainty as we approach the January 2026 meeting.
In the next week or two, we should also note thinning liquidity due to the Christmas and New Year holidays. While the overall trend is bearish for the pound, lower trading volumes can lead to sharp and unpredictable price changes. Normal trading conditions should resume in early January, providing a clearer environment for action.
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