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Strong start to 2022 for Sterling

14 Jan 2022

The Pound has enjoyed a strong start to the year, with gains against the Euro in week one followed by a robust move up against the Dollar in week two.

"GBP/USD is on the brink of a break clear of a long-term descending trend channel, which would be a bullish sign of further upside potential," said George Vessey, Western Union Business Solutions analyst.

In terms of the Pound versus the Euro, CIBC Capital Markets strategists say GBP/EUR will head towards 1.2080/1.2074, whilst ING analysts forecast a move to 1.2050.

"I remain positive on the GBP and bearish EUR/GBP but a touch more cautious on the latter given the recent move in EUR/GBP," according to Jonathan Pierce at Credit Suisse.

Whereas, head of European FX Strategy at BMO Capital Markets, Stephen Gallo commented: "Short EURGBP exposures make fundamental sense. While the speed of the move suggests the pair is slightly oversold, we would not be looking to aggressively fade it now. Rather, we'd continue to add to the position on rallies.”

Furthermore, the principal driver for the Pound continues to be Bank of England policy in the short and long-term, which is defined by the economy’s strength.

As it stands, markets have priced in a rate rise in February, with additional hikes taking the bank rate to 1.0% by the end of the year in a bid to suppress mounting inflation, Pound Sterling Live reports.

This implies a sharp rise for rates compared to other countries, providing support for Sterling.

"Sterling appreciated against EUR as well as against USD over the past weeks. Of course, attention is focussing mainly on monetary policy and the Bank of England’s surprise rate hike in December which provided support for Sterling," according to You-Na Park-Heger, a Commerzbank analyst.

A risk to the Pound’s advance is if the Bank of England doesn’t hike rates next month, and/or lowers market forecasts for future rate rises. Sterling may drop if the market’s current bet of rates increasing to 1.0% by the end of 2022 is questioned.