GBP: Relief rally on a tight BoE vote, then reality check from soft data

Sterling outperformed yesterday after the Bank of England delivered the expected 25bp cut to 3.75%, but with a tighter-than-feared 5–4 vote split. The market read-through was hawkish relative to positioning, and GBP jumped, briefly pushing GBP/USD back above 1.34 and GBP/EUR above 1.14. The move looked more like a squeeze than a shift in fundamentals, given heavy pessimism in GBP and the appeal of carry.

That said, the macro backdrop still points to limited GBP upside. UK disinflation has broadened, private-sector wage growth has slipped below 4% for the first time since 2020, and unemployment is close to a five-year high. This morning’s November retail sales added to the softer tone, coming in below expectations both on the month and year, reinforcing the view that demand is cooling.

On the fiscal side, the UK data were cleaner. Public sector net borrowing was reported at £11.7bn for November 2025, down from last year and the lowest November print in four years. A stronger tax and National Insurance take should help lean against any residual UK risk premium that built up this year. Even so, relative rates still look a headwind, and we expect rallies to remain prone to fading unless UK activity stabilises.

EUR: ECB stays put, projections improve, EUR bid via the rates channel

The ECB held its benchmark rate at 2.00% for a fourth straight meeting, repeating its data-dependent, meeting-by-meeting framing. The euro steadied and then improved as US inflation surprised lower, while the bigger support came from the ECB’s staff forecasts.

Growth projections were nudged higher, with 2025 GDP revised up to 1.4% and 2026 to 1.2%. Inflation for 2026 was also lifted to 1.9%, moving closer to target. With inflation around target and growth near potential, the bar to a near-term policy pivot looks high, and the market treated the update as mildly constructive for the single currency.

German yields moved higher on the upgrades, helping EUR through the rates channel. A gradual grind higher in EUR/USD into year-end looks feasible, but positioning remains a risk. Net long EUR exposure has been sticky since April, leaving the currency vulnerable if risk sentiment turns or the euro area data lose momentum.

USD: Softer CPI pulls yields lower, supports risk, keeps USD capped

US November inflation undershot expectations, pushing Treasury yields lower and weighing on the dollar on the day. Headline CPI fell to 2.7% and core CPI rose 2.6%, the softest core pace since 2021. The print strengthens the case for a more dovish Fed path if incoming December data also cools, while also easing near-term stagflation fears and lifting risk appetite.

Markets leaned into the signal quickly: equities bounced, crypto caught a bid, and the USD fell against most major peers. The move was partly tempered by firmer labour market signals, with initial jobless claims dropping to 224k and the four-week average at 217k, limiting the downside follow-through for front-end yields.

Net-net, the inflation surprise argues for easier Fed policy at the margin, which should keep the USD biased lower versus high carry and improving-growth peers, though the path will likely remain choppy into year-end liquidity conditions.

JPY: BoJ hikes again, but the yen softens as markets price a slow follow-up

The Bank of Japan raised rates by 25bp to 0.75%, the highest level since 1995, in a unanimous decision. The yen nevertheless weakened, with USD/JPY pushing to a two-week high. The immediate reaction suggests the hike was largely in the price, while the market remains sceptical about the speed of the next steps.

The BoJ signalled it expects the wage-price cycle to persist and left the door open to further tightening. However, expectations are for a gradual path, with the next full 25bp move not priced until late 2026. That gap between guidance and market pricing is keeping JPY vulnerable on days when global yields or risk sentiment rise.

Crosses remain stretched. GBP/JPY has rotated back towards multi-decade highs and EUR/JPY is near record territory, leaving JPY exposed to sharp, stop-driven moves if US yields reprice lower again or if risk sentiment wobbles.

Looking ahead

Key drivers into the next week are straightforward: follow-through in US disinflation prints and Fed rhetoric, the durability of the post-BoE repricing in UK cuts for 2026, and whether euro area data can validate the ECB’s upgraded growth view. For JPY, the focus is on how quickly markets start to believe the BoJ will deliver again, with USD/JPY still acting as the release valve for global rates volatility.