Weak UK GDP data has weighed on the pound ahead of a pivotal week featuring jobs data, CPI and a likely Bank of England (BoE) rate cut. While markets still underprice easing and point to EUR/GBP upside next year, extremely bearish sterling positioning raises the risk of a sharp short squeeze on any positive surprise, ING's FX analyst Chris Turner notes.

BoE cut looms this week

"Friday's soft UK October GDP data weighed on the pound. Looking ahead, it is a big week for UK data, central bank policy and sterling. Ahead of Thursday's expected Bank of England rate cut, we will see jobs data (including slowing private sector wage growth) and the November CPI release. On the latter, headline inflation should nudge lower, but core and services CPI should remain firm-ish at 3.4% and 4.5% year-on-year, respectively."

"A BoE rate cut this Thursday is only priced at an 85% probability. Doves like ourselves at ING expect Governor Andrew Bailey to cross the Rubicon and help deliver a 5-4 vote to cut rates to 3.75%. We then look for a further 50bp of easing in 2026 – a key reason why we see EUR/GBP heading up to 0.90 next year."

"One major threat to sterling bears, however, is positioning. Asset managers are currently running some of their shortest sterling positions in over a decade. Any positive surprises could be met with a very sharp sterling short squeeze. Expect to hear of some asset managers buying cheap upside protection in sterling, such as deeply out-of-the-money euro put sterling call options."