(Reuters) – Sterling was poised for its largest weekly gain against a weakening USD since December 2020, as new economic data suggests that the market may not have to reduce its expectation for Bank of England rate rises further.

The U.S. currency was set for the worst week since February 1, showing tiredness after its 14-week run of 10% gains.

After solid labor market data, the money markets have fully priced in an additional 25-basis points interest rate hike at the BoE’s June meeting as well as 128 basis point of tightening before the year ends.

Official data released Friday showed that retail sales in Britain rose unexpectedly in April.

After rising 1.65% last week, Friday’s pound fell flat to $1.246, the largest weekly gain since Dec 18, 2020 when it gained 2.3%.

“The UK retail sales are a little higher than we expected, and this breaks/suspends the narrative that the cost of living squeeze in large enough quantities to slow the Bank of England’s tightening cycle,” ING analysts stated.

The data this week showed that Britain’s employment rate fell to a record low of 48 years in the first 3 months of 2022. The consumer price inflation increased 9% in April according to Reuters, while economists polled by Reuters had predicted a reading as high as 9.1%.

Unicredit analysts (BIT:), believe the British currency may be undervalued relative to the dollar or the euro based on long-term models. But, the BoE might place more weight on sterling because it is less focused on UK GDP growth.

They anticipate the BoE to increase rates at a lower rate than the forward, which creates “repricing risks for the GBP”, as long investors do not reduce their rate-hike expectations.

Huw Pill (the central bank’s chief economic economist) stated that the BoE will need to increase interest rates to counter the self-perpetuating price increases.

Sterling rose 0.1% against the euro, to 84.74 pence.

Analysts from ING said that “new-found hawkishness by the ECB may mean that it might struggle to sustain a movement below 0.8450 before returning back to 0.8600.”

While the pound is showing high correlations with risky assets, their outlook remains uncertain in light of tightening central banks and potential economic slowdown.