(Bloomberg) -- Investor bets on pound gains are at the highest level for 17 years, leaving the currency at risk of a pullback if the Bank of England joins peers in signaling rate cuts this week.

Hedge funds remain bullish while asset managers are cutting back on their short positions, taking overall bets in favor of sterling to the most since July 2007, according to data from the Commodity Futures Trading Commission for the week to March 12. That follows a rally in the pound that has turned it into the year’s best-performing Group-of-10 currency.

The wagers are based on the BOE holding off on interest-rate cuts for longer than the Federal Reserve or European Central Bank, given UK prices remain sticky. Yet banks such as Goldman Sachs Group Inc. are warning the BOE could move earlier if this week’s inflation data slows more than forecast, leaving the pound exposed if investors exit their long positions.

“Current positioning suggests the pound upside potential is limited and that any negative news could trigger a correction,” said Roberto Cobo Garcia, head of G-10 FX strategy at Banco Bilbao Vizcaya Argentaria SA. “If inflation or employment data weakens in spring, the pound would trade in lower levels into the summer.”

Money markets are pricing the first 25 basis-point BOE cut in August, ahead of the central bank’s next meeting on Thursday. A shift to easing by June — as expected by both Citigroup Inc. and Goldman Sachs — would trigger a cut to these long positions in the coming weeks, BBVA’s Garcia said. 

Read more: Seven Charts That Will Guide the Bank of England on Rate Cuts

Bets in favor of the pound have increased for three straight weeks, the CFTC data showed. The pound has already climbed nearly 1% in March, as investors become more optimistic that the UK economy will grow this year after falling into recession at the end of 2023.

It’s now trading above $1.27, after touching a seven-month high near $1.29 earlier this month. Any indication of easing price pressures in UK data due on Wednesday could trigger selling, particularly if the Fed signals later on the same day that US rates may stay high for a longer period, said Erik Nelson, a macro strategist at Wells Fargo Bank. 

“Underlying UK price pressures have eased a lot over the past few months and I don’t think the FX nor rates market has fully reflected this,” he said. The combination of a hawkish Fed and dovish BOE could see the pound test support levels near $1.26, he added.

(Updates with analyst comment, prices from seventh paragraph.)

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