The Pound New Zealand Dollar (GBP/NZD) exchange rate fell sharply last week amid UK recession fears, but it rebounded through the second half of the session. This week, Sterling has manged to crawl higher as markets brace for three key central bank decisions.
What’s Been Happening: GBP/NZD Rebounds after Recession Worries Hit Sterling
The Pound (GBP) initially fell against the New Zealand Dollar (NZD) last week, after the economic forecasting group the EY Item Club predicted a deeper recession for the UK this year.
Recession fears were then compounded by a larger-than-forecast contraction in the UK’s vital services sector, with the services PMI falling to a two-year low.
Meanwhile, an upbeat market mood initially boosted the risk-sensitive ‘Kiwi’.
However, a disappointing inflation rate reading dampened Reserve Bank of New Zealand (RBNZ) interest rate rise expectations, which saw GBP/NZD recoup some losses. Sterling posted further gains as markets began to bet on another 50bps hike from the Bank of England (BoE) at this week’s meeting.
The ‘Kiwi’ was able to resist further losses, however, thanks to positive economic data. New Zealand’s latest business confidence index improved more than forecast in January, lifting NZD.
Three Things to Watch Out for This Week
- BoE Interest Rate Decision
The BoE will likely raise rates by another half point this week. However, it may signal an end to its tightening cycle. Could dovish forward guidance see the Pound slump?
- NZ Unemployment Rate
Economists expect New Zealand’s jobless rate to remain low at 3.3% in the fourth quarter of 2022. If so, it could lend NZD some support.
- NZD Consumer Confidence
A forecast rise in confidence among New Zealand consumers could also boost the appeal of the ‘Kiwi’ this week.
The BoE decision could drive most of this week’s movement. Along with the rate hike and the forward guidance, investors will also be eager to hear the bank’s economic forecasts. If the BoE expects the UK economy to fare better than previously anticipated, it could help cushion the downside from a slower pace of policy tightening.