In the US, the US Dollar is struggling, even with expectations of two more rate cuts by 2026 and possible changes in Fed leadership. This hesitance from USD buyers supports the GBP/USD pair and makes traders cautious about predicting large losses.

The BoE Interest Rate Decision

The Bank of England’s (BoE) decision on interest rates at its next meeting could impact the British Pound significantly, depending on whether they choose a strict (hawkish) or relaxed (dovish) approach. Analysts anticipate the next BoE interest rate will be set at 3.75%, down from the current 4%. With GBP/USD trading around 1.3370, significant changes are on hold. The focus is on the BoE’s interest rate decision and the US CPI report, both set to be announced today, December 18, 2025. The market is quiet as traders await this important data. It is expected that the BoE will lower its main interest rate by a quarter-point, bringing it down from 4.0% to 3.75%. This has been anticipated for weeks, so how the pound reacts will depend on the bank’s forward guidance. We will be listening for clues about the pace of further cuts in early 2026. This expectation is supported by recent weak economic data from the UK. November’s inflation was lower than expected at 3.2%, down from 3.6% in October. Additionally, the unemployment rate increased to 4.8% last quarter, the highest level since early 2021, which gives the BoE strong reasons to ease their policy.

The US Dollar and Inflation Data

In comparison, the US dollar isn’t showing much strength either, which helps the pound avoid further declines. Signs indicate a softening US labor market, leading many to believe that the Federal Reserve will need to cut rates at least twice in 2026. The US economy has slowed down since the robust growth seen in 2023 and 2024. Upcoming US inflation data is very important, with expectations for the headline number to drop to 2.8%. Recent job reports have also suggested a dovish Fed, as the last three Non-Farm Payroll reports averaged just 90,000 new jobs, significantly below the expected 150,000. If inflation data comes in softer than expected today, it will likely increase speculation about Fed cuts, putting more pressure on the dollar. With major risks from both central banks, buying short-term volatility seems like a smart strategy for the upcoming weeks. We are considering options contracts, such as straddles expiring in January 2026, which would benefit from a significant price move in either direction. This approach allows us to prepare for a breakout without guessing if it will go up or down. For those thinking about a directional trade, today’s outlooks will be crucial. If the BoE suggests a strong cutting cycle while US inflation stays stubborn, we may want to consider short positions in GBP/USD using put options. On the other hand, if US data presents a surprisingly dovish tone, the pair could rise, making call options a viable way to trade a potential dollar decline. Create your live VT Markets account and start trading now.

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