18/12/2025 Daily Reports
The Decision: A Close Call
- Rate Cut: The BoE has lowered rates to 3.75%, but the move was far from a dovish victory lap. The decision was “more hawkish than expected,” causing market rates to rise and giving Sterling (GBP) a relief rally.
- The Split: The committee is heavily divided with a razor-thin 5-4 vote. While Governor Bailey voted for the cut, four hawks dissented, citing concerns that inflation remains sticky.
The Inflation & Wage Battle
- Wage Worries: Despite falling actual wages, the BoE is concerned that expectations for wage growth have leveled out in the 3.5-4% range. This suggests price pressures might not vanish as quickly as hoped.
- Less of an Outlier: The UK is slowly shedding its status as an “inflation outlier.” Headline CPI is expected to near 2% by May 2026.
Future Outlook & FX Implications
- 2026 Roadmap: The next cut (likely February or March) is a toss-up. Analysts still predict two cuts in the first half of 2026, eventually bringing the base rate to 3.25%.
- Sterling Strategy: The lack of a strong dovish signal forced traders to unwind short positions on the Pound.
- GBP/USD: Supported towards the 1.34 year-end target, potentially hitting 1.36 in 2026.
- EUR/GBP: Expected to trend gently higher towards 0.90 through 2026.
What’s Next?
The most telling signal here isn’t the cut itself, but the 5-4 split. It reveals a central bank that is deeply unsure about where the “neutral” rate actually sits (likely between 3-3.5%).
For traders, this “hawkish cut” complicates the narrative. The market wanted a clear signal for aggressive easing, but the BoE’s focus on sticky wage expectations suggests the path downward will be slow and bumpy. This creates a short-term floor for Sterling, as the aggressive rate cuts priced into the market might have been premature.
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Global Markets & Tech Global equities are under pressure from “AI jitters” ahead of critical decisions from the BoE, ECB, and BoJ. The Nasdaq slid to a three-week low as Oracle shares dropped following reports of stalled funding for a massive $10B AI data center. In contrast, Micron stock surged in after-hours trading, driven by a blowout forecast on strong AI memory demand.
Central Banks & Economy
- Policy Divergence: The Bank of England is expected to cut rates to 3.75% amid slowing growth, while the Bank of Japan is widely expected to hike rates to a multi-decade high at its ongoing meeting (Dec 18–19).
- Europe: Germany’s Ifo business climate index unexpectedly fell in December, signaling weakening sentiment and weighing on the DAX.
- Japan: The Nikkei tracked Wall Street lower, with tech shares hit hard by the broader sector selloff as investors awaited the BoJ decision.
Commodities
- Oil: Prices climbed due to Trump’s stricter blockade on Venezuelan tankers and reports of potential new U.S. sanctions on Russia if peace talks fail.
- Gas: U.S. and European natural gas prices rose on colder weather forecasts, high LNG demand, and supply outages at Freeport LNG.
- Metals: Silver remains near record highs driven by industrial demand (solar/AI), while gold held steady as investors await delayed U.S. inflation data.
