Pound New Zealand Dollar (GBP/NZD) Exchange Rate Hinges on RBNZ and BoE Rate Decisions

Pound New Zealand Dollar (GBP/NZD) Exchange Rate Benefits from Jitters Ahead of RBNZ Meeting

An unexpected return to surplus for the New Zealand trade balance in December failed to have much impact on the Pound to New Zealand Dollar (GBP/NZD) exchange rate.

While this better-than-forecast result was a positive sign for the health of the domestic economy, with export volumes rising sharply on the month, investors remained stand-offish towards the New Zealand Dollar (NZD).

Confidence in the risk-sensitive NZD was largely limited by increasing bets on the likelihood of the Federal Reserve pursuing an aggressive pace of monetary tightening over the course of 2018.

As Friday’s positive US jobs report encouraged speculation over the possibility of four or more interest rate hikes in the coming months, the appeal of the New Zealand Dollar naturally diminished.

With the Reserve Bank of New Zealand (RBNZ) forecast to leave monetary policy on hold for the foreseeable future the chances of increased policy divergence between the two central banks naturally increased.

This helped to keep the GBP/NZD exchange rate on a generally stronger footing, in spite of unimpressive UK data.

Underwhelming UK PMIs Limit GBP/NZD Exchange Rate Momentum

January’s raft of UK PMIs proved largely disappointing, putting downside pressure on the GBP/NZD exchange rate.

As the construction sector slowed to a state of near-stagnation, and both the manufacturing and services PMIs fell short of forecast, this suggested that the UK economy started the year on a softer footing.

With economic growth showing signs of having lost at least some of its momentum at the start of 2018 concerns over the domestic outlook naturally increased, given the high level of uncertainty that still surrounds Brexit.

Reports that the UK is set to ‘categorically’ leave the EU customs union provoked additional jitters on Monday morning, raising concerns over the prospect of a harder form of Brexit.

Dovish RBNZ Message Forecast to Weigh on New Zealand Dollar (NZD) Exchange Rates

A rallying point could be in store for the GBP/NZD exchange rate, however, if the fourth quarter New Zealand employment data fails to impress.

Forecasts point towards a discouraging raft of figures, with the unemployment rate set to rise as wage growth slows on the quarter.

Naturally this would give investors fresh incentive to sell out of the New Zealand Dollar, adding to worries over the outlook of the domestic economy.

Even so, the major source of volatility for NZD exchange rates this week will be the RBNZ rate decision on Wednesday.

If the accompanying policy statement proves more cautious in tone the appeal of the New Zealand Dollar could diminish further, increasing the likelihood of the central bank keeping rates on hold for the foreseeable future.

On the other hand, any note of optimism may give NZD exchange rates another boost.

Pound (GBP) Set to Rally on Less Cautious BoE Policy Outlook

The GBP/NZD exchange rate could also see some sharp movement in response to the Bank of England’s (BoE) February policy meeting.

Signs of mounting inflationary pressure within the UK economy have kept the hopes of another interest rate hike alive, with markets keen to gauge the outlook of policymakers once again.

Any signs of increased hawkishness should be enough to lift the Pound higher, raising the odds of further monetary tightening in the near future.

However, if the quarterly Inflation Report takes a less urgent view this may prompt Sterling to cede ground to the New Zealand Dollar once again.

Hannah Wilson

Contact Hannah Wilson