Sterling dropped to a two-week low on Monday as investors anticipated the Bank of England's (BoE) interest rate decision on Thursday and awaited a significant speech by UK Finance Minister Rachel Reeves later in the day.

At the time of writing, the Pound was down 0.25% at $1.2834 after falling to $1.2807 previously in the session, a low not seen since 10th July.

Whereas the Euro rose against the Pound, edging up 0.11% at 84.46 pence, after reaching a two-week top of 84.59.

Traders increased their bets on Bank of England rate cuts, with derivative market pricing indicating an almost 60% chance of a reduction on Thursday, up from just over 50% late on Friday, Reuters reports.

This shift in rate expectations lowered British bond yields, putting pressure on the Pound.

“The pricing of the Bank of England rate cut continues to creep higher. The FX market may be catching up a little bit (with bond markets)... There's a bit of pre-positioning,” said Francesco Pesole, ING FX strategist.

Pesole added that Britain's relatively high interest rates have attracted investment towards the Pound, but this advantage could be “cut quite substantially” if the Bank of England reduces borrowing costs.  

Furthermore, investors were also anticipating a speech by Chancellor Rachel Reeves later on Monday, where she is expected to accuse the former Conservative government of leaving a shortfall of around £20 billion in the public finances.

The decline in Sterling reflected investor anxiety about Reeves' upcoming announcements, according to senior FX salesperson at TJM Europe, Neil Jones.

“If she points to tax increases, this will represent a U-turn and tarnish current positive global investor sentiment,” he commented.

Political factors have increased the uncertainty surrounding the Bank of England's decision this week, as many key policymakers have not made public statements for over two months due to restrictions on speeches in the lead-up to the 4th July election.

British inflation has returned to the 2% target, but the strong growth in services prices and wages has led some Bank of England officials to advocate for maintaining rates at 5.25% for a while longer.