The Pound Sterling (GBP) has continued to trade at weaker levels ahead of today’s Bank of England (BoE) policy meeting following the release yesterday of the much weaker than expected UK CPI report for November, MUFG's FX analyst Lee Hardman reports.

BoE guidance key for future rate path in 2026

"The report has reinforced expectations that the BoE will vote to cut rates today by a further 25bps, and deliver multiple rate cuts in 2026 as well. There is a compelling case for the BoE to continue cutting rates as the policy rate is not yet in neutral territory, inflation and wage growth continues to slow, and weakening labour demand is creating looser labour market conditions."

"The main caveats which could still justify caution from more hawkish MPC members include wage growth did not slow as much as expected and core services inflation is still proving sticky. The bigger drop in inflation in November was partially exaggerated as well by early Black Friday discounts. With a 25bps cut fully priced in, market participants will be closely scrutinizing the updated guidance to assess the future path for rate cuts."

"Another close 5-4 vote could offer some initial support for the pound while a stronger majority in favour of cut would trigger a further sell-off. We expect the guidance to indicate that further quarterly rate cuts are likely during the 1H of next year. We have been forecasting a low for the policy rate at 3.25% next year, but the risk of more cuts has increased recently supporting our outlook for further pound weakness in 2026."