The Pound to Euro exchange rate fell last week, as our previous Week Ahead Forecast predicted. We expect this pressure to continue leading up to Thursday's crucial decision from the Bank of England.

Over the past two weeks, GBP/EUR has declined from its 2024 highs. However, we see this weakness as part of a broader uptrend, with the overall outlook remaining positive. The exchange rate is still well above its 50-, 100-, and 200-day moving averages, and only when these levels are breached would we consider the uptrend at risk.

In the coming weeks, we anticipate a potential test of 1.20 (see forecasts from over 30 investment banks for Q3 and year-end). In the short term, we expect more room for weakness, with a test of 1.18 likely before the rally resumes. Last week, the exchange rate fell below the 21-day moving average, which is now limiting intra-day advances (currently at 1.1854), supporting our expectation of pre-Bank of England nerves pushing the rate down.

The Pound is experiencing crowded positioning, with many investors betting on further advances. This heavy one-way positioning means any disappointments in data or events could trigger a significant 'washout' and a deeper pullback.

Currently, markets see slightly more than a 50% chance of a rate cut on Thursday. Last week's weakness in the Pound reflects these recalibrated expectations, as the odds of a cut were closer to 40%.

If the Bank of England does not cut interest rates, it could provide some relief to the Pound, allowing for a rebound by the end of the week. However, a firm commitment to a September rate cut would create a 'dovish' hold, which might not support a strong rebound in the Pound.

Overall, we expect near-term weakness to give way to a resumption of the rally in the coming weeks.