Theresa May’s surprise call for a snap general election prompted the Pound to make strong gains across the board, despite an increase in short-term political uncertainty.
Markets are confident that the Conservatives will be able to secure a larger majority, given their current commanding lead over Labour in the opinion polls.
If May were to expand her parliamentary majority this would seem to pave the way towards a smoother form of Brexit, limiting the influence of opposition parties.
While this could lead to a hard exit from the EU investors are nevertheless encouraged by the prospect of the government facing less delays as it pushes through negotiations and agreement on any final deal.
However, the Pound New Zealand Dollar exchange rate may struggle to maintain its bullish trend in coming days, with the political landscape likely to shift in the weeks ahead of the election.
Any signs that the Conservatives may not make significant gains could put pressure on the Pound, with markets unlikely to greet any implication of continued uncertainty positively.
Sterling is likely to remain volatile for the foreseeable future, particularly if the latest domestic data reflects slowing growth.
A weaker showing from March’s retail sales figures could prompt Sterling to trend lower, given that resilient consumer spending has been a major driving factor of the UK economy in the wake of the Brexit vote.
General market risk aversion kept the New Zealand Dollar on a softer footing, meanwhile, as global geopolitical tensions remained high.
This overshadowed a positive services PMI, which rose from 58.7 to 59.0 in March and signalled continued expansion within the sector.
As Doug Steel, senior economist at BNZ, noted:
‘The PSI has been a bit like a stuck record, set on high volume. In fact, the volume dial is even getting tweaked up a bit more.’
Confidence in the ‘Kiwi’ could pick up, however, if the first quarter New Zealand consumer price index shows a solid uptick in inflationary pressure.
Higher inflation would give the Reserve Bank of New Zealand (RBNZ) greater incentive to return to a hawkish policy outlook, with forecasts pointing towards a jump from 1.3% to 2.0% on the year.
This could improve the appeal of the higher-yielding New Zealand Dollar, although there may be some scepticism amongst investors and policymakers as to whether inflation will hold at this higher level for long.
Any disappointment, on the other hand, could give the GBP NZD exchange rate further support, even if confidence over the UK election begins to falter.
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