The Pound surged higher across the board in the immediate wake of the Bank of England’s (BoE) September policy meeting. While the Monetary Policy Committee (MPC) still voted 7-2 in favour of leaving interest rates on hold the tone of the accompanying minutes proved surprisingly hawkish.
As the BoE indicated that some degree of monetary tightening may be appropriate ‘in the coming months’ markets scrambled to price in higher odds of a November or December rate hike. Naturally this sent the GBP NZD exchange rate on a bullish run on Thursday, even though some investors saw this as a case of jawboning.
Further gains were in store for the Pound ahead of the weekend thanks to fresh commentary from BoE policymaker Gertjan Vlieghe. Although Vlieghe has developed a reputation as one of the most dovish members of the MPC he ultimately echoed the hawkish tone of the meeting minutes, increasing bets for an imminent policy move.
Strong PMIs Boost New Zealand Dollar Outlook
While August’s New Zealand manufacturing PMI showed a solid uptick from 55.5 to 57.9 this was not enough to shore up the ‘Kiwi’ against its bullish rival. Even as the domestic economy continues to demonstrate signs of strength the upside potential of the New Zealand Dollar has remained rather limited.
However, as the corresponding services PMI demonstrated a similar strengthening on the month this helped to boost NZD exchange rates on Monday morning. A general improvement in market risk appetite also added to the appeal of the antipodean currency, with a lack of fresh developments on the Korean peninsula easing the minds of investors.
Confidence in Sterling started to ease somewhat, meanwhile, after a disappointing Rightmove house price index. With the domestic housing market continuing to lose momentum as consumer confidence diminishes the outlook for the wider UK economy remains rather questionable.
Weak Retail Sales Could Exacerbate GBP NZD Downside
The mood towards the Pound could sour further if August’s UK retail sales figures prove discouraging. As forecasts point towards a stagnation in sales growth on the month this is likely to undermine optimism in the domestic outlook, indicating a continued decline in consumer confidence.
Similarly, a significant increase in public sector net borrowing may give investors cause to doubt the likelihood of an imminent BoE rate hike. Rising government debt would highlight the UK’s continued vulnerability to any deterioration in its trade conditions, exposing the GBP NZD exchange rate to fresh downside pressure.
Demand for the New Zealand Dollar, on the other hand, could pick up as a result of second quarter gross domestic product data. If the New Zealand economy demonstrates further solid expansion this is likely to diminish the prospect of any Reserve Bank of New Zealand (RBNZ) dovishness, boosting confidence in the domestic outlook.
However, if the general sense of market risk appetite deteriorates once again in response to geopolitical tensions surrounding North Korea this could weigh heavily on the ‘Kiwi’. Another dip in Global Dairy Trade auction prices could also limit the appeal of the commodity-correlated currency in the near term.