GBP: BoE cut in focus, but shorts are crowded

Europe’s policy calendar dominates today, and sterling faces headline risk into the Bank of England decision. A 25bp cut to 3.75% is the base case, with attention on the split and tone. A 6–3 outcome would read more dovish, particularly after the softer November inflation print, helped by falling food prices.

On the face of it, that setup leans GBP-negative. The counterweight is positioning. With speculative accounts already heavily underweight sterling, follow-through selling may prove harder to sustain even if the communication tilts more accommodative than expected. In the cross, a quick lift in EUR/GBP towards 0.8820–0.8840 looks feasible on the announcement.

EUR: ECB projections risk a reality check

The ECB should be the day’s main driver for the euro. Markets will test whether last week’s firmer messaging is reinforced through updated projections and the press conference. The inflation profile is the key watchpoint. Any renewed emphasis on undershoot risk at the longer horizon, alongside softer growth assumptions, would likely support a rally in the front end and unwind part of last week’s rise in yields.

That mix would be mildly euro-negative and could drag EUR/USD towards 1.1680–1.1700 on a repricing at the short end. Options may also matter into year-end, with sizeable strikes clustered around 1.1750–1.1800 over the coming sessions, potentially shaping price action in thinner liquidity.

USD: CPI unlikely to shift the narrative

The dollar remains broadly supported, with DXY holding above 98.00 and recent headlines failing to move the needle. Fed communication has leaned cautious rather than urgent, and the market still prices limited odds of a January cut. Our bias remains for a first move in March.

Today’s US data should be secondary unless jobless claims deliver a clear surprise. Even the delayed CPI print is unlikely to force a meaningful reset in expectations, with consensus looking for headline inflation around 3.1% year on year. A firmish number would fit the “sticky” story, but it would not, in our view, be enough on its own to reprice the Fed path. Near term, the dollar is more likely to take its cues from Europe, where any softness in EUR and GBP could pull DXY back towards the 98.80 area.

Looking ahead

The BoE vote split and guidance on the pace of easing will set the tone for sterling, before attention shifts quickly to the ECB projections and press conference, where the longer-run inflation path and growth assumptions are likely to drive rates and the euro. In the US, jobless claims and the delayed CPI release matter mainly for surprise potential rather than confirmation. Into year-end liquidity, keep an eye on DXY holding 98.00, EUR/USD support in the 1.1680–1.1700 region, and EUR/GBP resistance around 0.8820–0.8840 (1.1312-1.1337), with room for retracement if the ECB fails to validate last week’s hawkish turn.