The Pound New Zealand Dollar (GBP/NZD) exchange rate hit its highest level since May 2020 last week and continues to hold its gains.
Markets anticipating the Bank of England (BoE) raising interest rates this week has underpinned Sterling, while the New Zealand Dollar has struggled amid Federal Reserve-driven market jitters and concerns over a conflict in Ukraine.
What’s Been Happening: Pound Gains despite Political Uncertainty and Growth Worries
The Pound (GBP) struggled last week but made gains against its risk-sensitive peers, with support coming from expectations the BoE will hike interest rates at its February policy meeting.
Pressure on GBP came from concerns over weaker UK economic growth after January’s manufacturing and services PMI fell to an 11-month low to indicate slowing business activity.
UK political uncertainty and doubts over the future of Prime Minister Boris Johnson have also limited the Pound due to the furore over Downing Street parties and lockdown breaches.
Meanwhile, the risk-sensitive New Zealand Dollar (NZD) slumped in midweek trade following a more hawkish than expected tone from the Federal Reserve and the threat of a Russian invasion of Ukraine that soured market mood.
Surging fourth quarter New Zealand inflation to 5.9% tempered some of NZD’s losses, as investors expect more aggressive tightening from the reserve Bank of New Zealand (RBNZ) in response.
Three Things to Watch Out for This Week
- Bank of England Interest Rate Decision
Markets widely expect the BoE to raise interest rates to 0.5% from 0.25% on Thursday in an attempt to bring down soaring inflation.
The rate hike may also signal the start quantitative tightening from the central bank of its asset holdings of £875 billion.
- New Zealand Unemployment Rate
Forecasts point to the New Zealand unemployment rate remaining at an all-time low of 3.4%, potentially increasing the likelihood of the RBNZ raising interest rates more at its policy meeting on 23rd February.
- UK Government Situation
With only part of the report into Downing Street lockdown breaches published while a police investigation is ongoing, uncertainty looks set to continue over Prime Minister Boris Johnson’s future.
Pound New Zealand Dollar Forecast
The Pound New Zealand Dollar exchange rate may refresh its 20-month high again this week with the BoE widely expected to hike rates and the Downing Street parties scandal paused until the result of the police investigation.
However, any downward revisions to the UK’s services PMI for January may cap Sterling gains over fears of weak economic growth caused by slowing business activity.