Markets were not impressed to find that UK inflation had held steady on the year in July, particularly as the monthly measure showed a mild contraction in inflationary pressure. While
this offered some relief to consumers, who have faced a severe squeeze on household finances in the wake of the Brexit vote, the GBP NZD exchange rate slumped in response to this weaker-than-expected data. Even after UK average weekly earnings showed an unexpected uptick on Wednesday this was not enough to encourage a rally for the Pound, with the chances of any imminent interest rate hike from the Bank of England (BoE) still rapidly fading.
As the Federal Open Market Committee’s (FOMC) July meeting minutes proved to be rather more dovish in nature than markets anticipated this offered a boost to the New Zealand Dollar. The odds of the Fed achieving a third interest rate hike before the end of 2017 diminished on the back of the minutes, reducing the appeal of the US Dollar. This encouraged investors to buy into the higher-yielding New Zealand Dollar, particularly as confidence in the abilities of the Trump administration also diminished.
GBP NZD Boosted by Weaker NZ Consumer Spending
A slight slowing in New Zealand credit card spending dented the appeal of the ‘Kiwi’ on Monday morning, even though consumer spending remained at elevated levels. Market risk appetite faltered once again, meanwhile, as tensions between the US and North Korea looked to be at risk of flaring up. With the appeal of risk-sensitive currencies limited there was little reason for investors to continue to favour the New Zealand Dollar at the start of the week.
Although the Rightmove house price report for August proved rather mixed this was not enough to prevent the GBP NZD exchange rate from trending higher. While the health of the domestic housing market remains somewhat questionable technical support helped to shore up the Pound after its recent losses. With new government debt expected to show a more limited increase in July the mood towards Sterling improved, at least in the short term.
New Zealand Trade Deficit Could Extend NZD Slump
Further volatility is likely in store for the New Zealand Dollar on the back of Wednesday’s raft of trade data. Forecasts point towards July’s trade balance showing a deficit of -200 million, a sharp decline from the previous month’s surplus. This could erode confidence in the health of the New Zealand economy, with a significant fall in exports likely to foster concerns over domestic growth. If economic conditions are seen to deteriorate this would give the Reserve Bank of New Zealand (RBNZ) further reason to sit tight on monetary policy.
No change is expected for the second estimate of the UK second quarter gross domestic product, which could offer some measure of support to the GBP NZD exchange rate. Unless the report points towards a greater loss of momentum within the domestic economy the downside potential of the Pound is likely to remain limited. However, if the underlying details of the report highlight sustained signs of a slowdown this could still weigh heavily on the appeal of Sterling.
With the government expected to outline its position on Brexit further over the coming days the GBP NZD looks set to remain under pressure. Unless the UK’s position shows signs of softening markets are unlikely to react positively to any developments, though, with the threat of an acrimonious divorce still hanging over the domestic outlook.