The Pound to New Zealand Dollar exchange rate fell last week due to fresh Brexit concerns. However, Saturday’s 2017 New Zealand election result has caused uncertainty, making the risky New Zealand Dollar less appealing.
GBP/NZD tumbled from 1.8633 to 1.8400 last week, but briefly touched its best level in a week on Monday morning and trended above the level of 1.85 again.
Pound (GBP) Advances Despite Economic Uncertainties
Despite a lack of optimistic UK news in recent sessions, the Pound recovered most of its Friday losses against the New Zealand Dollar when markets opened on Monday.
Sterling plummeted on Friday when UK Prime Minister Theresa May failed to impress investors with the latest Brexit speech.
May proposed a transitionary period of two years following the Brexit date in March 2019; a move which many analysts had expected for some time.
Traders were disappointed by May’s indication that the UK government would still prefer no UK-EU deal to a bad one, reviving concerns that the Brexit process could still end with a cliff-edge scenario.
However, while some EU officials hoped for more clarity from May on factors such as the UK-EU divorce bill, EU chief negotiator Michel Barnier has described May’s speech as constructive.
Investors largely brushed over news that Moody’s had downgraded Britain’s credit rating from Aa2 to Aa1, as Moody’s economic warnings on Brexit had already been largely priced into the Pound.
New Zealand Dollar (NZD) Weakened by Election Results
New Zealand’s 2017 general election took place on Saturday and the election’s results weren’t too far off polling projections.
As expected, the National Party took the biggest share of votes, but the Labour Party also saw strong performance and neither party won a big enough majority to form a government by itself.
The National Party won 58 out of 120 seats, while the Labour Party won 45.
These results could potentially be followed by weeks of coalition talks, as the National Party and Labour Party look to hold talks with NZ First, the nationalist party which took the third largest number of votes.
Until a new government is formed, New Zealand Dollar volatility is likely to continue on the uncertain political and economic outlook.
Investors are anxious about the possibility of a highly uncertain coalition which could form between the Labour Party, the Green Party and NZ First. However, analysts believe a coalition between the National Party and NZ First is more likely.
GBP/NZD Forecast: Recovery Could Continue until Risk-Sentiment Returns
With political uncertainty weighing on the New Zealand Dollar and a lack of strong domestic news, GBP/NZD could more easily advance in the coming weeks.
While the New Zealand Dollar’s weakness is likely to be limited due to the somewhat low chance of a coalition between Labour, Green and NZ First parties, uncertainty will still make the ‘Kiwi’ less appealing overall.
However, NZD demand could surge on Wednesday night if the Reserve Bank of New Zealand (RBNZ) takes a more hawkish than expected tone on monetary policy.
Due to rising interest rates in other major economies, markets have speculated that the RBNZ may take a more hawkish tone itself.
If the RBNZ surprises investors with hawkishness, GBP/NZD will likely plunge despite NZ political uncertainties. On the other hand, if the bank takes a cautious or dovish tone, the Pound’s recovery will continue.
Sterling demand could also be bolstered on Friday, if Britain’s final Q2 Gross Domestic Product (GDP) report impresses investors.