The Pound New Zealand Dollar (GBP/NZD) exchange rate slid on Tuesday morning ahead of the Reserve Bank of New Zealand (RBNZ) interest rate decision later tonight.
News that Russia will send troops into two regions of eastern Ukraine is stoking market volatility, but the New Zealand Dollar is making gains on RBNZ rate hike expectations.
What’s Been Happening: Pound Squeezed by Cost-of-Living Crisis
The Pound (GBP) trended lower over the last week due to concerns over the cost-of-living squeeze weakening the UK’s economic growth outlook.
Employment data showed that wage growth in the UK continues to lag behind inflation, despite average earnings unexpectedly rising to 4.3% in December’s data. The figures showed pay declined in real terms by -0.1% for total pay and -0.8% year-on-year for regular pay.
Inflation soaring above forecast to a new 30-year high of 5.5% added to fears over the mounting cost-of-living crisis in the UK, especially against the backdrop of upcoming tax increases, and surging energy and fuel prices.
The New Zealand Dollar (NZD) climbed through last week amid shifting risk appetite on reports about a solution to the Ukraine crisis through diplomacy.
NZD exchange rates also benefitted from expectations the RBNZ will raise interest rates to 1% from 0.75%, although some investors have priced in a larger 50 basis point rise to 1.25%.
Three Things to Watch Out for This Week
- RBNZ Interest Rate Decision
With the RBNZ expected to hike rates for the third consecutive meeting in the early hours of Monday morning, the New Zealand Dollar may receive a boost if interest rates rise more than expected.
- Ukraine Crisis
Ongoing escalation of tensions fuelling the prospect of a military conflict look set to continue driving market volatility, potentially causing large swings in GBP/NZD.
- Bank of England Policymaker Comments
Speeches from Bank of England (BoE) policymakers ahead of the monetary policy committee (MPC) meeting in March will likely drive Sterling movement. While the BoE is widely expected to raise rates, a larger rate rise after adopting a hawkish tone may provide Sterling additional support.
Pound New Zealand Dollar Forecast
The Pound New Zealand Dollar exchange rate may recover some of its recent losses if risk-off trade weakens the risk-sensitive ‘Kiwi’. However, a larger-than-expected rate hike from the RBNZ could boost the New Zealand Dollar.