The pound has slightly dropped from its over two-month high which it reached this Wednesday, but the outlook remains positive with traders expecting additional gains. Researchers at Barclays also anticipate the pound to continue outperforming its major peers over the coming months.

The pound’s retreat today was not driven by any specific economic factor and could be attributed to traders readjusting their trades ahead of the all-important US consumer inflation figures.

Pound’s positive performance could continue researchers say

Markets generally believe that the pound’s strong performance in the first week of the new year was largely driven by expectations for a February interest rate hike and this could continue in the coming weeks and months.

The market now expects a ~75% chance of a second rate hike at the BoE’s February  policy meeting. This has also been further boosted by expectations that the US Federal Reserve will proceed to a faster and earlier interest rate hike cycle in 2022.

With inflation rising in both the UK and the US, markets expect higher interest rates in the US and the UK, which will support the British currency.

UK retail sales

The latest annual Retail Sales Monitor report from the British Retail Consortium (BRC) showed that sales grew, but consumer spending slowed the final weeks of 2021. The British Retail Consortium said that UK retail sales grew by 2.1% in December with growth coming in at 9.9% year on year. Government restrictions slowed spending, but in general the Omicron variant did not have a massive impact as retail sales held up through December. However, January is expected to be a more difficult month for the high street with footfall at UK outlets seen lower in the first week of January.

Businesses in the retail sector have warned that the spread of Omicron and the increasing costs of living could have a significant impact on sales this year.

Bank of England interest rate hikes

While a February rate hike would be the second interest rate rise in just two months, the total number of hikes to be delivered in 2022 is yet unknown and will be a crucial factor in the pound’s performance.

The Bank of England's unexpected December rate hike has led the market to believe that there will be more near-term rate hikes. As it becomes clearer how the Bank is expected to act and how many rate hikes will be delivered over the coming months, the pound will gain further support.

With the Omicron variant slowly subsiding and markets regaining optimism the British currency will also gain traction. As BBC reported on Wednesday, Covid cases in the UK are decreasing according to the daily figures released by the government, with the number of cases confirmed over the past seven days having fallen 13% compared to the previous week.

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