Can GBP/NZD Exchange Rate Reclaim Some of Last Week’s Highs on Strong UK Inflation Data?

Will Strong January UK Inflation Data Push GBP/NZD Exchange Rate Back towards Last Week’s Post-BoE Meeting Highs?

The GBP/NZD exchange rate was on unsteady form on Tuesday and Wednesday last week, with Monday’s worse-than-expected decline in the UK services PMI for January weighing on Sterling.

With little on the data calendar of note, the focus was firmly on ‘Super Thursday’, which would see the Monetary Policy Committee (MPC) announce its latest policy decisions, as well as publishing the first Inflation Report of 2018.

The Pound Sterling to New Zealand Dollar exchange rate exploded after the latest announcements, with Bank of England Governor Mark Carney signalling that more rate hikes were to come.

Speaking at a press conference following the publication of the Inflation Report, Carney stated;

‘It will be likely to be necessary to raise interest rates to a limited degree in a gradual process but somewhat earlier and to a somewhat greater extent than what we had thought in November.’

GBP/NZD hit a nine-week high following the announcements, although the gains of more than three-and-a-half-cents were surrendered again on Friday after the latest slew of UK data proved disappointing enough to see markets questioning the BoE’s optimism.

The December trade deficit slumped much further than expected to -£4.8 billion, while the National Institute of Economic and Social Research (NIESR) predicted that UK GDP would have slowed from 0.6% to 0.5% in January, adding to concerns over the economic outlook after Monday’s disappointing services PMI.

Solid New Zealand Labour Data and Dairy Price Growth Keeps GBP/NZD Exchange Rate Volatile even as RBNZ Remains Neutral

The GBP/NZD exchange rate had plenty of high-profile developments from New Zealand to deal with last week.

The New Zealand Dollar received a boost from a double dose of positive data on Tuesday, starting with a 5.9% surge in the price of dairy at the latest Global Dairy Trade auction.

Global dairy prices have been largely declining over the last few months, but the start of January saw this trend sharply reversing; the growth seen at the latest fortnightly event follows a rise of 4.9% on 16th January and of 2.2% on 2nd January, which have combined to take the average price per metric tonne above US$3,500 again for the first time in months.

Further supporting NZD was Tuesday evening’s positive fourth-quarter employment data.

The unemployment rate unexpectedly dropped to 4.5% instead of rising to 4.7% as forecast, employment change slowed to 3.7% instead of the predicted 3.6% and average hourly earnings growth dropped from 1.2% to 0.8% instead of the anticipated 0.5%.

However, positive sentiment towards the ‘Kiwi’ was undermined on Wednesday evening after the Reserve Bank of New Zealand (RBNZ) kept interest rates frozen at 1.75% and signalled that it was still holding a neutral policy outlook.

Stronger-than-Expected UK Inflation Data Helps GBP/NZD Exchange Rate Curb Losses after Supporting Case for Further BoE Interest Rate Hikes

Although the GBP/NZD exchange rate continues to record losses this morning, strong UK January inflation data has helped to shorten losses after showing a rebound in price growth.

December’s consumer price index figures had disappointed after showing a worse-than-expected drop off in core inflation, but today’s core price growth figures have clocked in at 2.7% instead of the smaller predicted rise to 2.6%, while overall consumer prices have held steady at 3% year-on-year, instead of weakening to 2.9% as predicted.

This has further strengthened the case for the Bank of England to accelerate the pace of interest rate hikes, fuelling a Pound recovery, although the New Zealand Dollar remains strong thanks to the recent government budget figures.

Tax receipts were NZ$600 million higher than estimated during the second half of 2017, while the government operating surplus clocked in at NZ$1.1 billion during the same period; triple the NZ$311 million predicted.

Net debt levels also impressed, clocking in at -NZ$515 million below expectations.

New Zealand Dollar Forecast to Benefit from GBP/NZD Exchange Rate Weakness on Quiet UK Data Calendar until Friday

The rest of the week’s UK data calendar remains empty until Friday, when the publication of January retail sales figures will give markets a chance to gauge consumption at the beginning of the year and see if that disappointing services PMI for January gave an accurate picture of the UK economy.

In the meantime there are a few New Zealand publications for markets to react to, starting with tonight’s food prices growth data for January.

Food prices represent just under 20% of the total CPI growth in New Zealand, so the performance seen in January could have a notable effect upon inflationary pressures.

The Reserve Bank of New Zealand will release its first quarter two-year inflation expectation early tomorrow morning; considering the neutral policy bias held by the central bank recently, it is unlikely that this long-term prediction for price growth will excite investors.

Thursday offers only the Business NZ manufacturing PMI for January.

Adam Solomon

Adam joined the team at TorFX soon after graduating from University in 2005 with a degree in Journalism. Since then Adam has advanced to become both Head of Trading and Head of Treasury. His keen interest in the currency market and knowledge of what drives exchange rates makes him perfectly positioned to produce regular market updates focused on the movements of the major currencies.

Contact Adam Solomon