Pound to New Zealand Dollar (GBP/NZD) Exchange Rate Losses Forecast as BoE Turns Dovish

Update: Pound New Zealand Dollar (GBP/NZD) Exchange Rate Softens on UK Sales Contraction

An unexpectedly sharp contraction in the BRC like-for-like sales figure put pressure on the Pound to New Zealand Dollar (GBP/NZD) exchange rate on Wednesday.

With consumers continuing to rein in their spending in response to the wage squeeze and Brexit-based uncertainty confidence in the outlook of the UK economy remains limited.

This left Pound (GBP) exchange rates on a weaker footing ahead of Thursday’s Bank of England (BoE) interest rate decision.

Pound New Zealand Dollar (GBP/NZD) Exchange Rate Boosted by Fresh Geopolitical Worries

News that the US is pulling out of the Iranian nuclear deal prompted a sharp surge in market risk aversion, offering a fresh boost to the Pound to New Zealand Dollar (GBP/NZD) exchange rate.

Investors became spooked by the increase in global geopolitical tensions spurred by the decision, even as European nations move to salvage the deal.

This left the New Zealand Dollar (NZD) on a generally weaker footing as market risk appetite diminished.

However, the downside potential of NZD exchange rates was limited ahead of the Reserve Bank of New Zealand’s (RBNZ) interest rate announcement.

With markets bracing in anticipation of the latest RBNZ commentary, even though no change in monetary policy is forecast, the GBP/NZD exchange rate struggled to record significant gains.

Brexit Developments Limit GBP/NZD Exchange Rate Downside

In the wake of April’s disappointing UK services PMI the Pound to New Zealand Dollar (GBP/NZD) exchange rate has clawed back some of its losses, in spite of worries over the domestic outlook.

Even though signs point towards the UK economy remaining on a weaker footing at the start of the second quarter the decline of the Pound (GBP) was temporarily limited.

Technical resistance helped to lift the GBP/NZD exchange rate away from its three-week low, particularly as the House of Lords pushed back against the government’s Brexit bill.

As peers voted through a number of amendments to the bill, including a vote for MPs on remaining within the European Economic Area, this encouraged a greater sense of confidence in the Pound.

Less Optimistic BoE to Weigh on Pound to New Zealand Dollar (GBP/NZD) Exchange Rate

However, the Pound to New Zealand Dollar (GBP/NZD) exchange rate could well come under renewed pressure in the wake of the Bank of England’s (BoE) May policy meeting.

Although investors no longer expect to see any change in interest rates at this stage the upside potential of GBP exchange rates is limited.

On the other hand, if policymakers prove more dovish on the domestic outlook than anticipated the Pound looks vulnerable to further losses.

The quarterly Inflation Report may also provoke volatility for the GBP/NZD exchange rate on Thursday, with markets keen to gauge the likely timing of any future BoE policy action.

If the latest inflation forecasts suggest that price pressures are easing this could diminish the odds of a 2018 BoE interest rate move further.

GBP/NZD Exchange Rate Boost Forecast on Dovish RBNZ Meeting

Persistent RBNZ dovishness could help to shore up the Pound to New Zealand Dollar (GBP/NZD) exchange rate, meanwhile.

Signs of a more cautious RBNZ outlook would give investors fresh incentive to sell out of the New Zealand Dollar, especially as the Federal Reserve looks set to pursue a more aggressive pace of monetary tightening.

As the central bank is forecast to leave monetary policy on hold for the foreseeable future the potential for a NZD exchange rate rally appears limited, barring a significant shift in the RBNZ’s rhetoric.

A weaker showing from the latest New Zealand food inflation index may also offer support to the Pound to New Zealand Dollar (GBP/NZD) exchange rate ahead of the weekend.

Hannah Wilson

Contact Hannah Wilson