Pound New Zealand Dollar Exchange Rate Climbs amid Risk-Off Trade

The Pound New Zealand Dollar (GBP/NZD) exchange rate is trending higher on Tuesday after firming through last week.

Heightened volatility in currency markets amid escalating tensions over the threat of a Russian invasion of Ukraine looks likely to continue driving significant movement in GBP/NZD in the coming days.

What’s Been Happening: Pound Firms on Bank of England Rate Hike Bets

The Pound (GBP) strengthened last week on expectations the Bank of England (BoE) will raise interest rates at its February policy meeting, with UK inflation soaring to 5.4% increasing pressure on the central bank.

However, Sterling faced headwinds over fears of a cost-of-living crisis in the UK after unemployment data released earlier in the week revealed wage growth fell behind inflation, meaning a real terms pay decline.

Political uncertainty over Prime Minister Boris Johnson’s future and a sharp -3.7% contraction in retail sales in December also limited GBP, as concerns grow over weaker UK economic activity at the end of last year going into 2022.

Meanwhile, the risk-sensitive New Zealand Dollar (NZD) tumbled in risk-off trade as markets fear aggressive monetary policy tightening from the Federal Reserve starting in March that could dent global economic recovery.

The threat of a Russian invasion of Ukraine also dented market risk appetite, weighing on the New Zealand Dollar.  

Three Things to Watch Out for This Week

  1. Situation in Ukraine

The prospect of conflict in Ukraine may continue eroding market risk appetite following Monday’s selloff.

Tensions continue to escalate after NATO put additional forces on standby for mobilisation and the US prepares to send troops to Eastern Europe.

  1. New Zealand Fourth Quarter Inflation

Forecasts point to inflation soaring to 5.7% in the final three months of 2021, which may increase pressure on the Reserve Bank of New Zealand (RBNZ) to continue hiking interest rates in February.

  1. UK Political Uncertainty

With the results of the inquiry due this week into Downing Street parties, pressure could increase on UK Prime Minister Boris Johnson to resign and prompt some volatility in the Pound.

Pound New Zealand Dollar Forecast

The Pound New Zealand Dollar exchange rate could climb again this week as events in Ukraine and the Federal Reserve interest rate decision have the potential to drive risk-off trade, which would dent NZD.

The New Zealand Dollar may receive some support on balance of trade and inflation data, while the Pound may experience additional volatility on political developments and post-Brexit trade talks headlines.

Andrew Roberts

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