Weaker-than-Expected UK Inflation Fails to Undermine GBP/NZD Exchange Rate Gains

UK Inflation Data Comes in Below Forecast but GBP/NZD Exchange Rate Holds Strong Gains

A slower pace of UK consumer price growth during February than economists had expected has failed to undermine strong gains made by the GBP/NZD exchange rate this morning.

The Pound is 0.5% higher against the New Zealand Dollar, even after the soft figures, which has reduced the pressure on the Bank of England (BoE) to hike interest rates during the Monetary Policy Committee (MPC) meeting in May.

Month-on-month, consumer prices grew 0.4%, slightly undercutting the recovery from -0.5% to 0.5% economists had been anticipating.

Overall price growth slowed from 3% to 2.7%, while core price growth weakened from 2.7% to 2.4% – coming short of forecasts by ten basis points in each instance.

The data has failed to dent the GBP/NZD exchange rate’s recent gains, with the pairing having climbed around five cents over the past seven days.

An empty UK data calendar failed to hamper the Pound last week, while Tuesday’s Spring Statement from Chancellor of the Exchequer Philip Hammond contained gloomy economic forecasts from the Office for Budget Responsibility (OBR), yet was met largely positively due to a minor upwards revision in 2018’s estimated growth rate.

New Zealand Dollar Slumps: GBP/NZD Exchange Rate Retains Strong Gains as Markets Focus on Approaching US Policy Decision

The US Federal Open Market Committee (FOMC) is set to announce its latest policy decisions tomorrow evening and expectations of a rate hike are keeping appetite for the commodity-correlated New Zealand Dollar weak, boosting the GBP/NZD exchange rate over the past seven days.

Although a rate hike at this meeting has been expected for some time now and is therefore largely priced-in to the currencies affected, markets are still uncertain as to the long-term policy outlook for the United States.

If the Fed signals that it still expects three hikes this year, the New Zealand Dollar could rise sharply, but if policymakers seem likely to target four or more rounds of tightening then NZD could see a sustained sell-off.

As well as the focus on US policy, the ‘Kiwi’ has been kept soft by disappointing domestic data over the past few days.

Figures on Wednesday showed a worse-than-expected current account deficit of –NZ$2.77 billion during the fourth quarter of 2017, while on Wednesday the GDP figures for the same period disappointed forecasts for accelerated growth to hold at 0.6% month-on-month and climb to 2.9% instead of 3.1% year-on-year.

GBP/NZD Exchange Rate Forecast to Remain Volatile as Global Dairy Auction and Approach of RBNZ Announcements Weigh on New Zealand Dollar

There is no UK data left for release today, but the Pound could still cause movement for the GBP/NZD exchange rate as markets try and figure out the impact of today’s inflation data on consumer spending and the monetary policy outlook – both of which could be altered further by tomorrow’s average weekly earnings data.

Furthermore, the Bank of England will announce its latest monetary policy decisions on Thursday.

Meanwhile, the New Zealand Dollar could see notable volatility following the conclusion of today’s Global Dairy Trade auction.

As New Zealand’s top export, the price of dairy can have a large impact upon the overall economy, so markets will be looking for prices to remain around current levels or climb higher.

As BNZ’s Chief Economist Tony Alexander explains, ‘[Farmers’] incomes can go up and down massively and when this happens, especially in dairying, the whole economy can feel the effects.’

Average prices per metric tonne have recently returned to above US$3,500 after several weeks of declines, but after sharp upticks the last two fortnightly auctions have resulted in minor drops again.

Another decline could suggest that prices have peaked and are set to correct lower, which would weigh on the New Zealand Dollar.

However, NZD may be spared from excessive turbulence due to the approach of the Reserve Bank of New Zealand’s (RBNZ) monetary policy announcements.

No change is expected to the official cash rate (OCR), so markets will be looking to see how the latest monetary policy statement impacts the longer-term outlook.

Laura Parsons

Laura has been working in the financial services sector since 2012 and provides currency news updates for a number of online and print publications. Over the years she has produced exchange rate analysis for publishers like French Property News, The Express, The Telegraph and Forbes.

Contact Laura Parsons