On Thursday, August 1st at 19:00, the Bank of England will hold an interest rate decision. Last week, the pound fell against the euro, and Thursday's important decision by the Bank of England will continue to bring pressure.

This week, Bank of England may cut interest rates, and the pound may weaken

Dutch Cooperative Bank analyst Jane Foley believes that the Bank of England may cut interest rates by 25 basis points this week. This move may prompt some long positions in the pound to take profits. The market currently believes that the possibility of the Bank of England cutting interest rates on Thursday is slightly higher than 50%.

Bank of America analyst Kamal Sharma said, "Before the interest rate meeting, we believed that if the Bank of England cut interest rates, the risk would asymmetrically lean towards a weak pound. There are two factors that indicate this: long positions in the pound are crowded; and rising market volatility has historically been unfavorable for high beta currencies

He added, 'Even in the case of hawkish interest rate cuts, we tend to believe that as holdings decrease, the market will continue to sell the pound during interest rate cuts.' Hawkish interest rate cuts' refer to the Bank of England's interest rate cuts, but send a signal to the market that further cuts are not guaranteed and depend on upcoming data. '.

Jane Foley, senior foreign exchange strategist at Rabobank, said, "The position suggests that the pound may be more sensitive to disappointing news or dovish comments from the Bank of England, indicating that volatility will further expand

The pound position is crowded, and in recent weeks, investors have a large number of positions that will benefit from further gains in the pound. The risk of such a heavy one-way position is that any disappointing data or event can lead to a 'wash' of these positions, resulting in a deeper pullback.

Market analyst Gary Howes believes that the GBP/EUR exchange rate may challenge 1.20 in the coming weeks (EUR/GBP down 0.83). However, in the short term, there may be more room for weakness in the exchange rate, and it is believed that 1.18 can be tested before resuming the rebound.

Bank of England does not cut interest rates this week or stimulate pound rebound

What if the Bank of England doesn't cut interest rates? This may bring some upward pressure to the pound, which may rebound this weekend.

However, as the Bank of England is almost certain to raise interest rates in September, the upside space may be limited. Andrew Goodwin, Chief UK Economist at Oxford Economics, said, "The conditions for the Monetary Policy Committee to cut interest rates are already in place, but we believe they will wait until September to avoid surprising the market

The firm commitment to a September rate cut will make it a 'dovish' viewpoint, which is not entirely consistent with the rebound of the pound.

In addition to the short-term weak outlook, Bank of America believes that the structural background still supports the pound.

Sharma said, 'With the disappearance of event risks, the new government seems eager to announce policies, and we expect the pound to further rise in the coming months.' This still provides support for the pound, but positions have been tight recently.

EUR/GBP daily chart