By Jamie McGeever

ORLANDO FL (Reuters) – Although hedge funds were present at the Bank of England’s last week policy meeting, which was the most favorable on sterling since July 2007, many will be disappointed with the Bank’s surprising decision not to increase interest rates.

Bank of England’s 7-2 vote at the Bank to maintain its key lending interest rate at 0.1% shocked global markets. This decision quickly earned international notoriety and became one of most prominent examples of policy misguidance in recent history.

It was even more shocking that Andrew Bailey, Chief Economist of the Bank, and Huw Pil, Bank Governor, had indicated during the week-end that an increase in interest rates was possible. Investors were accordingly.

The Commodity Futures Trading Commission data shows that in the week ending Nov. 2, hedge funds and other speculators increased their net sterling long position to 15,047 contracts. This is worth approximately $1.3 billion.

This was the longest net since July and also the most bullish bet against any G10 currency relative to the U.S. Dollar, according to data.

These positions were likely to be destroyed by the slump in the pound after the decision. On the day, sterling/dollar exchange rates, also known as ‘cable,’ fell 1.4%, which was its highest fall since August 2013 and sterling trade weighted sterling saw its worst week in eleven months.

The cable price fell as low at $1.3422 Thursday. This is just above the low point of $1.3410 in September. This looks to be a support key chart now.

Investors revised their BoE outlook, and UK yields also fell dramatically. The five-year gilt yield dropped 20 basis points on Wednesday, making it the largest fall in five years. On Friday, the 10-year inflation-linked bonds yield fell to 3.166%, its lowest level in nearly a year. Meanwhile, the linker yield for five years fell to an historic low of -3.73%.

Nordea’s strategists have opened a new position in short cable to counter the decline of relative interest rate support. On Sunday, they stated that “The Bank of England is flip-flopping and without credibility.”

Many analysts point out that Sterling’s future direction is dependent on real yields. George Saravelos at Deutsche Bank (DE:). Simply put, sterling will fall further if UK real rates continue to drop.

Hedge funds had a poor year overall trading currencies due to low foreign exchange market volatility for so many years. Implied sterling volatility for one month is now 7%, which is only three weeks high.

Hedge fund data provider HFR reported that its benchmark currency index dropped 4.37% in October. This was the lowest month since years, and plunged the index further into the black for the year. The index is among HFR’s 40 most popular, representing a wide range of strategy and asset types.

Hedge funds are known for going against the grain. Many hedge funds will share Roberto Mialich’s view that long sterling is not as high now than at the beginning of this year. It is a sign that there are still opportunities for investors to expand their exposure to BoE tightening.

However, will the Bank of England increase rates next month? The answer, if history is to be believed, is no. In fact, there was only one December rate increase in 45 years, which occurred in 1994.

(By Jamie McGeever; editing by Diane Craft)