The EUR/GBP rate kicked off 2022 by plunging to a low record since the February 2020. That was due to the bank's decision to raise interest rates by 0.25 percent in mid-December 2021. 

When the news was written (January 12), the currency pair of this neighboring country was still slumping in the range of 0.8330s. Some analysts even suspected that pound sterling will be stronger in a short term period. 

The latest Barclays research reveals that the pound sterling was the G10's best performing currency during the first week of 2022. Sterling's appreciation is mainly caused by a thing. 

That is the release of short positions that have piled up, as well as the market expectations for a further rate hike in February. The condition like that changes some parts. 

Sterling has a Chance to Become Stronger

If these two topics continue to grow in the upcoming weeks, GBP will be even more resilient. CFTC data at the end of last year showed that the majority of trading positions over GBP were still short. 

Consequently, sterling has the potential to continue to strengthen along with more and more traders closing their short positions. So far, that is the stronger possibility to happen. 

The urgency of closing short positions is higher due to a strong speculation around the BoE's second hike. Money markets are currently accounting for a 75% chance.

That is especially of a hike at the Bank of England's MPC meeting on 3 February 2022. That opportunity was controlled by the BoE's interest rises in December.

It Depends on the Fed Rate Hike Projection

The situation above happened as well as the More Hawkish Direction of Federal Reserve Policy in the last FOMC minutes. There is a situation which can affect everything. 

The faster the "Fed rate hike" projection, the faster the "BoE rate hike" projection too. Barclays said that the pound sterling would continue to be boosted by the close of short positions in the short term. 

Sterling is likely to fall again if the market has accumulated it’s long positions later. Martinez said that people continue to expect GBP to perform well in the coming weeks.

It is as these drivers gain further momentum in the market. Aside from the BOE, European Central Bank or ECB has it’s own point of view about this. 

ECB may Maintain the Interest Rate Longer

The European Central Bank (ECB) has the potential to keep theinterest rates near zero for a longer period of time. It is done based on certain considerations.

ECB Executive Board member Isabel Schnabel said at the weekend that rising energy prices might force the central bank to start highlighting the pace of inflation.

However, the market participants shrugged off the comments because the consensus assumes that it is just too early for the ECB to talk about the tightening monetary policy. 

The BoE-ECB policy direction gap is behind the current decline in the EUR/GBP rate. However, the GBP/USD struggle and the projected pound rate in the long term are even more complicated.

A Huge Question Mark on How The BOE Realization Is

The cause of the situation above is BoE hasn't necessarily raised their interest rates faster and more than the U.S. Federal Reserve. There are big question marks over how much of the upcoming "BoE rate hike" will be realized.

It is following the analysts' concerns that market participants are overestimated at the central bank known as the "unreliable boyfriend. It is not the thing to be highlighted. 

The surprise of the BoE's rate hike in December immediately triggered a recalculation of the short-term rate hike. However, markets have historically struggled to account for the BoE's terminal interest rate.