The latest raft of UK labour market data failed to bolster the appeal of the Pound for long, even though the unemployment rate unexpectedly fell from 4.6% to 4.5%.
Wage growth remained distinctly disappointing, with the average weekly earnings measure slowing from 2.1% to 1.8% in the three months to May. This indicated that the squeeze on household finances is deepening, reducing consumers’ ability to spend and boost economic growth.
Naturally this reduced the odds of the Bank of England (BoE) adopting a tightening bias in the near future, limiting support for GBP exchange rates.
A modest dip in the New Zealand manufacturing PMI saw the ‘Kiwi’ lose momentum ahead of the weekend, with confidence in the health of the domestic economy easing somewhat. Even though the index remained well within expansion territory at 56.2 the moderation was enough to spook investors.
As bets on the prospect of a return to monetary tightening from the Reserve Bank of New Zealand (RBNZ) have mounted, this has seen the antipodean currency strengthen sharply, leaving it vulnerable to downside pressure when market sentiment falters. This allowed the GBP NZD exchange rate to regain ground on Friday, even as weaker US data generally boosted risk appetite.
New Zealand Dollar Struggled to Capitalise on Strong Chinese Growth
June’s New Zealand services PMI also showed a slight slowing in sector growth, limiting the strength of the ‘Kiwi’ on Monday. This prevented the commodity-correlated currency gaining any particular benefit from the strength of China’s latest growth and production figures. The world’s second largest economy surprised to the upside, with growth holding steady at a robust 6.9% in the second quarter.
While there remains some scepticism over the accuracy of official Chinese data, this nevertheless helped encourage investors to pile back into higher-yielding assets. However, this bullish mood was not enough to shore up the New Zealand Dollar.
Confidence in the outlook of the Pound remained muted, meanwhile, as official Brexit negotiations recommenced in Brussels. Even though the process so far has proven relatively smooth the fear of a souring of relations is likely to persist for the foreseeable future.
Signs of division within the Conservative minority government are equally weighing on Sterling, with reports emerging of renewed cabinet infighting. As the political situation is still rather more fragile than investors would like, this prevented the GBP NZD exchange rate from starting the week on a particularly strong footing.
GBP NZD Volatility Forecast on Weaker Inflation
Demand for the New Zealand Dollar could diminish further if the second quarter consumer price index shows a significant weakening in inflationary pressure.
Forecasts point towards inflation easing from 2.2% to 1.9% on the year, potentially undermining the case for the RBNZ to consider raising interest rates in the near future. However, if the general sense of market risk appetite continues to pick up this could offer some measure of support to the ‘Kiwi’ in the short term.
UK CPI data will also be in the spotlight this week, with inflation forecast to have continued to run close to 3% on the year. Even if inflationary pressure is found to have eased in June, though, this is unlikely to offer the Pound a rallying point.
Although the increasing squeeze on wages remains a cause for concern investors are still primarily focused on the prospect of the BoE raising interest rates from their current record lows. As a result, anything that seems to diminish the odds of a BoE rate hike looks set to weigh on the GBP NZD exchange rate.