Key takeaways:
- Pound bolstered by decision not to impose stricter Covid restrictions in England.
- BoE rate hike bets also underpin Sterling.
- GBP Monthly lows: €1.17, $1.31, AU$1.84, NZ$1.95, C$1.69
- GBP Monthly highs: €1.20, $1.37, AU$1.89, NZ$2.01, C$1.73
The pound was able to close 2021 on a positive note, with the currency rallying against the majority of its peers as the UK government opted to not impose stricter Covid restriction in England over the holiday period.
Sterling them maintained this positive momentum into the start of 2022 as Boris Johnson insisted there is a ‘good chance’ the country could ‘ride out’ the Omicron Covid variant without needing to implement more draconian measures.
Further underpinning the pound were growing bets that the Bank of England will hike interest rates again when it next meets in early February.
This helped to carry the GBP/EUR past a key barrier of resistance to strike its best levels since the start of the pandemic.
However the pound faced some resistance in the form of UK political jitters. Boris Johnson’s attendance of a ‘bring your own booze’ Downing Street garden party during England’s first lockdown in May 2020 caused a major furore and raised questions over the future of his premiership.
Also acting as a headwind for GBP exchange rates are concerns over the UK’s impending cost-of-living crisis, with analysts warning the economic recovery could be at risk as inflation continues to outstrip the pace of wage growth.
Looking ahead, a key catalyst of movement in the pound over the next month will undoubtedly be the BoE’s latest policy meeting.
With a February rate hike from the BoE already largely priced in by GBP investors, the bank’s forward guidance is likely to prove more influential than the hike itself. If the BoE indicates it might more aggressively target multiple rate hikes in 2022 in order to combat surging inflation then the pound could surge.
Meanwhile, markets are likely to keep a close eye on UK political developments, with Sterling likely to slump if Boris Johnson is ultimately forced to contend a leadership contest.
