Pound New Zealand Dollar Exchange Rate Limited after Inflation-Driven Volatility

The Pound New Zealand Dollar (GBP/NZD) exchange rate is rangebound so far this week after sustaining losses through last week’s session.

UK and New Zealand inflation rate data drove shifting Bank of England (BoE) and Reserve Bank of New Zealand (RBNZ) interest rate hike expectations, which in turn stoked volatility in GBP/NZD.

What’s Been Happening: GBP/NZD Fluctuates on Central Bank Rate Hike Expectations

The Pound (GBP) tumbled in the middle of last week as investors repriced expectations for the BoE to raise interest rates following a surprise slowing in UK inflation to 3.1% in September from 3.2%.

Sterling recovered soon after as investors bet on a rate hike by the end of the year or early 2022, but ended the week fluctuating following mixed UK data, with September retail sales unexpectedly slumping -0.2% and better-than-expected growth in October’s manufacturing and services PMIs.

Meanwhile, the New Zealand Dollar (NZD) continued benefitting from market expectations that the RBNZ would raise interest rates more aggressively after NZ inflation soared to 4.9% in the third quarter.

However, NZD exchange rates came under pressure later in the session as risk-on trade gave way to souring market sentiment.

The mood turned cautious due to Chinese property developer Evergrande threatening to default on debt repayments and sparking an equity market selloff, which weighed on the risk-sensitive ‘Kiwi’.

Three Things to Watch Out for This Week

  1. UK Autumn Budget

Plans for spending to support the UK’s economic recovery will likely drive movement in the Pound on Wednesday as investors consider the effect on economic activity.

  1. Risk Appetite

The risk-sensitive New Zealand Dollar will remain sensitive to shifting market mood, with the Evergrande crisis threatening to sour sentiment again as more payment deadlines approach for China’s second largest property developer.

  1. Rising UK and New Zealand Covid-19 Cases

Following calls from medical professionals in the UK for the government to reintroduce restrictions, the Pound may come under pressure as rising coronavirus infections could derail the UK’s economic recovery.

At the same time, New Zealand’s daily infections remain near record highs, potentially impacting economic activity in the country.

Pound New Zealand Dollar Forecast

The Pound New Zealand Dollar exchange looks set for more volatility this week and may struggle to rise from a near seven-month low ahead of the BoE interest rate decision next week.

Andrew Roberts

Contact Andrew Roberts