By Samuel Indyk

Investing.com – The pound has had a mixed year in 2021. At the beginning of 2019, the currency was among the top performing G10 currencies. This is due to the UK’s most recent vaccination programs and the fact that the UK and EU had a Brexit trade deal at the end 2020.

Sterling suffered from ongoing Brexit problems, the muddling Bank of England and stubbornly high COVID case numbers. The currency will end the year with small losses and slight gains against the.

These are the Key Topics for 2022

Many of the same themes that dominated 2021 are likely to be dominant into 2022, with Brexit, Omicron and Omicron all expected to play their part.

Brexit

A new trade and cooperation accord was announced by the UK (EU) at the close of 2020. The agreement covers goods, services, intellectual property as well aviation and fisheries, and enforcement. The deal prompted a surge in the Pound at the start 2021. However, the UK has indicated it might suspend portions of the Brexit agreement for Northern Ireland (known as the Protocol).

This protocol was put in place to stop checks at the Northern Ireland border, which is part of both the UK and Republic of Ireland. The UK claimed that the protocol was a compromise and that it had been put in place to prevent checks along the border between Northern Ireland, which is part of the UK, and Republic of Ireland, which are both EU members.

“Next year the focus will continue on post-Brexit trading arrangements, particularly over the Northern Ireland protocol,” said ITC Markets Europe and Americas Head of FX & Macro Analysis Robert Hoodless. “The expectations are for a conclusion on these matters in Q1, but the market may not be easily scared on these matters having experienced years of headlines on the matter.”

Bank of England

The Bank of England was the first central bank to increase its interest rate and to begin to eliminate the crisis stimulus in place since the outbreak of the pandemic. The Old Lady of Threadneedle Street voted on 16 December to raise the interest rate 15 basis points, to 0.255%, and allowed the end of the current program of quantitative easing.

In 2022 the main focus of attention will be how many interest rate increases are predicted throughout the year.

“The pressures we still see building domestically within the labour market, in services, prices, inflation and so forth, need to be addressed by somewhat tighter policy and a somewhat higher bank rate,” the Bank of England’s Chief Economist Huw Pill said on the day after the decision.

The market is currently pricing in approximately 80 basis points of tightening during 2022. This would be equivalent to three interest rate rises.

Inflation

The Bank of England will raise interest rates 3 times per year in 2022 because it fears inflation may spiral out of control.

“The trend that everyone is watching in 2022 is inflation,” Justin Grossbard, Co-Founder and Chief Editor at Compare Forex Brokers told Investing.com. “With quantitative easing increasing demand while supply chains are stretched it appears inevitable that inflation will increase, forcing interest rate hikes to be considered.”

The Bank of England’s latest Monetary Policy Report from November showed that the central bank expected inflation to peak in the Spring of 2022, before falling as the impact of higher oil and gas prices begins to fade.

The central bank however saw inflation as measured using the to peak at around 5%. CPI reached 5.1% in November.

Pandemic – Omicron

In 2022, the evolution of the pandemic is another consideration for the pound. Current Omicron strain is the predominant COVID-19 strain in Britain. Daily case numbers have reached record highs, which are far greater than any time during the pandemic.

Omicron may cause less severe disease that the previous dominant varieties, like Delta or the original.

If this is the case then the UK seems to have added social restrictions. Prime Minister Boris Johnson has not ruled out further lockdowns.

Newsquawk senior analyst Danny Baker believes Omicron could be an important factor in the future outlook of the Pound.

“Much depends on the evolution of the pandemic with Omicron adding a new/different dimension to the Delta variant (not to mention any other mutations or strains of the virus that emerge),” Baker told Investing.com.

Government Turmoil

The final piece of the jigsaw that pound traders will have to navigate in 2022 will be whether Prime Minister Johnson’s Conservative Party can see out the current turmoil.

Johnson was the victim of a revolt in Parliament by over 100 of his MPs regarding new COVID rules. In addition, the Conservative Party lost an election in North Shropshire, which the Liberal Democrats had previously held for nearly 200 years, to the Liberal Democrats.

After Owen Paterson, Conservative MP and was found guilty of violating the rules for paid advocacy by Commons Select Committee on Standards, the election was called.

“The longevity of PM Johnson heading a Conservative majority is another matter worth considering,” ITC’s Hoodless added. “A replacement waits in the wings, in the form of UK Chancellor of the Exchequer Sunak. Mr Sunak may well differ from PM Johnson’s ‘boosterism’ strategy, and look to tax and spend less than current government policy prescribes. The Chancellor’s more Thatcherite intentions of deregulation, and an abrogation of European regulations are also well known. Such a political change later on in the year may have implications for the pound.”