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BoE cut: dovish consensus, hawkish risk
Heading into today’s Bank of England (BoE) meeting, it could be that the risks tilt toward doves being disappointed and further risk‑premia compression — dynamics that could actually support pound gains. It’s a contrarian view, but one worth considering given how much pessimism is already priced into GBP.
UK data since November’s BoE meeting have validated the case for a cut today, with wages and CPI reinforcing confidence that inflation is easing. Following yesterday’s softer‑than‑expected inflation print, the market now sees a 25-basis point cut as near certain – taking Bank Rate to 3.75%. But the odds of two cuts in 2026 have also jumped to 70% from 40% pre‑release.
Our baseline is a close 5–4 vote split, with Governor Bailey tipping the balance in favour of easing now that Autumn Budget risks have passed. Of course, the labour market and inflation backdrop raises the risk of a more dovish 6-3 vote split, which would weigh on GBP. We think this is the more likely surprise. But given markets have already recalibrated, the greater risk to GBP volatility is a hawkish surprise from a still‑divided committee.
While lower rates are usually a drag on a currency, much of the pessimism is arguably already embedded in GBP relative to rate differentials. Plus, softer inflation and falling UK yields ease debt‑servicing costs and compress risk premia, whilst the terminal rate remains sufficiently high to preserve sterling’s carry appeal — keeping short positions costly. This present an upside risk to the pound’s valuation.
Positioning is an important consideration too. CFTC data show investors held large net GBP shorts into late November. Some unwinding has likely occurred since the Budget, but scope remains for further repositioning if the BoE fails to validate dovish bets.
Finally, one‑week implied vols in GBP against both EUR and USD have barely moved despite this week’s heavy risk calendar. Overnight vols remain steady as well, signalling markets see little chance of outsized surprises. That complacency, however, is often the perfect setup for being caught off guard.
ECB: steady rates, shifting expectations
The final ECB meeting of the year is expected to be uneventful, with policy left unchanged for a fourth consecutive time. Euro weakness could follow, however, if Isabel Schnabel proves to be a hawkish outlier and growth forecasts are revised only marginally higher.
Recent data have bolstered hawkish voices on the Governing Council, supporting steady policy and keeping the odds tilted toward higher rates rather than renewed easing. If President Lagarde’s messaging reinforces this repricing, EUR/USD could gain further support via rate differentials.
Attention will focus on updated projections. Growth is likely to be revised higher for 2026, with only minor changes to inflation, leaving the outlook broadly consistent with September’s baseline. What has shifted more meaningfully is market pricing: investors have moved from expecting modest cuts to now entertaining the possibility of a new hiking cycle — a shift that helped the euro briefly spike above $1.18 against the dollar.
Our fair‑value models show EUR/USD more balanced than earlier in the autumn, but for spot to hold comfortably in the $1.18 zone through year‑end, two conditions are likely required: weaker US data and confirmation of the ECB’s hawkish tilt.
Bottom line: The December meeting is unlikely to deliver policy fireworks. With dovish expectations already pared back, the greater risk lies in hawkish disappointment — leaving EUR/USD direction dependent on both US data surprises and the ECB’s tone.
Dollar firms before CPI report
Markets are bracing for Thursday’s CPI release, with headline inflation projected at 3.1%. Any print slipping into the 2% range could spark a Treasury rally and weigh on the US dollar, as investors recalibrate expectations for the Fed’s policy path. A beat might support the dollar through reduced Fed easing bets, but would also reinforce stagflation fears – a key uncertainty within the FOMC.
Treasury volatility has been grinding lower, with the ICE BofA MOVE Index sliding to its weakest level since early December and now testing the subdued ranges last seen in 2021. The calm reflects a market that sees questions around tariffs, the broader economic outlook, and the next Fed chair as issues for 2026 rather than immediate catalysts.
Mixed labor market signals earlier in the week did little to shift Fed expectations: markets continue to price at least one more cut in 2026. Fed Governor Waller suggested there is room to ease more given softer employment trends, but Atlanta Fed President Bostic struck a more cautious tone, saying he does not anticipate further reductions in borrowing costs next year.
A softer‑than‑expected CPI report could knock the dollar lower and ignite a bond rally, while any upside surprise would reinforce the Fed’s cautious stance and limit USD downside into year-end.
Market snapshot
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: December 15-19
All times are in GMT
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
