On Thursday (December 19th), the Bank of England (BoE) kept its benchmark interest rate unchanged at 4.75% as expected, but behind this move lie profound policy differences and concerns about the economic outlook. At this point, GBP experienced significant short-term fluctuations, hitting a low of 1.2583 before rebounding slightly and now trading at 1.2607, reflecting market concerns about the future monetary policy path of the Bank of England.

After the announcement of the resolution, GBP experienced a rapid decline, with a short-term drop of nearly 47 points and a low of 1.2583. Although the market rebounded later, this fluctuation reflects the market's sensitive reaction to the content of the resolution. Especially, three committee members voted in favor of a 0.25 percentage point interest rate cut, becoming one of the key factors determining the trend of the pound. According to a Reuters survey, the market generally expects only one committee to support a rate cut, which exceeded market expectations and led to short-term fluctuations in the pound.

Policy divergence and economic outlook

In this resolution, there are significant differences among members of the Bank of England's Policy Committee (MPC). Despite ultimately keeping interest rates unchanged, three commissioners - Vice Governor Dave Ramsden, External Commissioner Swati Dhingra, and Alan Taylor - voted in favor of a 0.25 percentage point rate cut, believing that the current weak demand in the economy could lead to a large output gap and low inflation in the future, thus requiring a more accommodative monetary policy.

However, Andrew Bailey, the Governor of the Bank of England, insists that in the face of high economic uncertainty, the central bank should not promise when or how much interest rate cuts will be made. He pointed out that adopting a "gradual interest rate cut approach" is still appropriate, especially under the combined effects of various factors such as the current labor market and wage growth. Bailey also stated that the Bank of England will face significant uncertainty in 2025, and the central bank will not be able to commit to a specific timetable or magnitude of interest rate cuts.

The Bank of England also acknowledges that despite the higher than expected Consumer Price Index (CPI) in November, overall inflation levels remain relatively moderate. Official data shows that the CPI rose by 2.6% year-on-year in November, slightly higher than the expected 2.4%, while the core CPI annual rate rose to 3.5%, also slightly higher than expected. This data highlights the persistence of inflationary pressures and further validates the necessity for the central bank to maintain cautious policies.

Technical analysis of the trend of the pound

From a technical perspective, the short-term trend of GBP/USD is full of challenges. As the resolution was released, the GBP fell to 1.2583 in the short term, and market sentiment began to be affected by expectations of a more relaxed monetary policy, putting pressure on the GBP. If the GBP continues to fall below this low point, the next support level may test the November low of 1.2486, or even lower to the 1.2420 area. If the GBP can rebound strongly and break through the December low of 1.2698, it may provide momentum for future gains, especially if there are more obvious policy differences among central banks in the future, the GBP may have more opportunities for rebound.

Future prospects

Looking ahead, the trend of the pound will continue to be constrained by the fundamentals of the UK economy and the direction of the Bank of England's monetary policy. Although the market generally expects the Bank of England to continue cutting interest rates in 2025, given the strong performance of the labor market and persistent inflationary pressures, it is expected that the rate cuts will be gradual. The short-term trend of GBP will depend on the sustained performance of economic data, especially wage growth and inflation trends. If future data continues to show a slowdown in UK economic growth and a rebound in inflation, the GBP may come under pressure, while conversely, if market expectations of interest rate cuts are too pessimistic, the GBP may rebound.