The New Zealand Dollar was undermined by stronger US data, particularly as confidence in the US administration began to recover somewhat. A sharp jump in consumer confidence encouraged investors to pile out of the antipodean currency, with the odds of the Fed pursuing a more aggressive pace of monetary tightening rising. This helped keep the GBP NZD exchange rate on a stronger footing in the early week, even though Brexit-based uncertainty looked set to only intensify.
Once Article 50 was formally triggered the Pound turned volatile, even though a large degree of risk had already been priced in. Investors were initially relieved by the more conciliatory tone struck by Theresa May, with hopes raised that divorce proceedings might yet be amicable and not end with the UK crashing out of the single market. However, Sterling soon returned to a weaker footing as signs of disagreement between the UK and EU began to emerge. With even the order of negotiations under contention, this did not offer much encouragement.
GBP NZD Weighed Down by Disappointing Manufacturing PMI
In spite of better-than-expected Chinese data the appeal of the risk-sensitive ‘Kiwi’ remained limited ahead of the weekend. While demand for higher-yielding currencies generally weakened, the GBP NZD exchange rate also benefitted from a slump in the New Zealand business confidence index. Sentiment was found to have dipped in February as the measure slipped from 16.6 to 11.3, suggesting that businesses are less optimistic in the outlook of the domestic economy.
However, the GBP NZD exchange rate was prompted to shed its gains on Monday as the UK manufacturing PMI proved disappointing. Rather than strengthening as expected, the index instead weakened from 54.6 to 54.2, pointing towards a loss of momentum within the sector. This suggested that the economy ended the first quarter on a weaker note, raising the odds of a similar shortfall from March’s service PMI.
Solid Dairy Prices Could Boost NZD
Jitters are likely for the ‘Kiwi’ ahead of the latest GlobalDairyTrade auction result. A stronger showing here could give investors greater cause for confidence in the New Zealand Dollar, though, as this would bode well for the health of the domestic dairy industry. If the general mood of markets sees an uptick in risk appetite this could weigh on the GBP NZD exchange rate. The ‘Kiwi’ could also benefit from a positive showing on March’s ANZ commodity price index.
If Wednesday’s service PMI proves similarly discouraging then the Pound could extend its bearish trend further. With the UK economy’s strength largely dependent on the service industry, any signs of slowing here would undermine confidence in the economy as a whole. As ongoing Brexit uncertainty is likely to put pressure on domestic economic conditions for some time to come, a weaker service sector would not bode well.
Comments from Bank of England (BoE) Governor Mark Carney could encourage further Sterling selling later in the week. If Carney maintains a neutral outlook on monetary policy and talks down the possibility of interest rates rising in the near future the Pound is likely to weaken. While markets have taken a more hopeful view following the BoE’s March policy meeting, the prospect of tighter monetary policy still remains limited.