Pound Sterling (GBP) dropped sharply against the US Dollar (USD) after the UK inflation numbers came in weaker than expected. This disappointing inflation data has increased the likelihood of a Bank of England (BoE) rate cut. Analysts predict a 25 basis point cut in the upcoming BoE meeting, which will influence monetary policy expectations through 2026. The GBP decreased by 0.7% against the USD, lagging behind all G10 currencies after the unexpected Consumer Price Index (CPI) results. Both headline and core CPI were reported at 3.2% year-on-year. Yield spreads have narrowed, reducing recent support for the pound. Market sentiment continues to play a major role, as protection against downside risks for GBP/USD has diminished.

Impact On Monetary Policy

Today, December 17, 2025, the recent UK inflation data has greatly changed the outlook for the Pound. The headline and core inflation figures both came in at 3.2%, lower than the expected 3.5%. This reinforces our expectation that the Bank of England will cut rates tomorrow. Traders should view a 25 basis point cut from the current 4.5% rate as almost certain. This inflation report doesn’t stand alone; it follows earlier data showing UK retail sales fell by 0.5% in November 2025, indicating a decline in consumer demand. This gives the central bank a strong reason to start an easing cycle. Any short-term strength in the Pound should be seen as a chance to take bearish positions. In the next few weeks, we recommend buying short-dated GBP/USD put options to take advantage of expected downward movement. The Pound’s most likely path is now downward, as the market quickly adjusts the BoE’s policy outlook for 2026.

Comparisons To Past Market Shifts

The narrowing yield spread between UK gilts and U.S. Treasuries is a major factor here, removing essential support for the currency. Recently, the UK-US 2-year yield differential tightened by 15 basis points this week, its lowest since early 2025. This trend is likely to put pressure on the Pound as we enter the new year. This scenario resembles the market shift we saw in late 2023 when early signs of disinflation led to quick pricing of future rate cuts. Therefore, positioning for a prolonged decline in the Pound through 2026 seems wise. This might include selling longer-dated GBP call options to profit from the limited upside of the currency. Interestingly, the cost of options to protect against a fall in the Pound hasn’t surged, indicating a calm market adjustment rather than panic. This could provide a good opportunity to take bearish positions before a broader consensus forms. We should be ready for the Pound to reach lower levels as expectations for rate cuts continue to grow. Create your live VT Markets account and start trading now.

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