A recent surge in bullish bets on sterling by hedge fund and other asset managers has set the scene for a sharp correction in the currency, should the Bank of England opt to lower interest rates later this week, according to a report by Bloomberg.

The report cites data from the Commodity Futures Trading Commission as revealing that hedge funds have ramped up their net-long positions on sterling to the highest level in a decade, with the bullish sentiment also reflected in a broader measure that includes asset managers, which has reached a record high.

The BOE's decision on Thursday is highly uncertain, with market pricing indicating an even split on whether rates will be cut. The report quotes Francesco Pesole, an FX strategist at ING, who suggests that a rate cut could significantly impact the pound and says it could "deal a substantial hit."

Lee Hardman, meanwhile, a senior currency strategist at MUFG, has warned that the pound is "vulnerable to a position squeeze in the near term". Last week, JPMorgan Chase & Co also cautioned that the pound's strong rally might be due for a correction.

Sterling reached a one-year high earlier this month, bolstered by investor optimism over relatively high interest rates, a strengthening economy, and a stable UK government. Since the start of the year, the pound has appreciated nearly 1% against the US dollar.

Leveraged funds, which include hedge funds, have significantly increased their bullish bets on the UK currency, reaching levels last seen in July 2014. These net-long wagers have more than doubled in the past month and have risen for four consecutive weeks.