The GBP NZD exchange rate saw strong performance for most of the week, until Thursday’s Bank of England (BoE) policy decision left Sterling far less appealing.
Despite falling from a two-week-high of 1.7903, the Pound to New Zealand Dollar rate remains well above the week’s opening levels of 1.7477. The pair currently trends near 1.7665.
Pound (GBP) Long-Term Outlook Drops on BoE Dovishness
Over the past week, data has been unable to provide Sterling with any strong support and the Bank of England (BoE) took a more dovish tone than investors hoped.
Some investors were speculating that the BoE could surprise by hiking interest rates in order to combat high inflation. However, most analysts didn’t expect this and the bank left rates frozen as expected.
Investors were also disappointed that only two policymakers voted to hike rates after three hawkish votes in June, which some analysts predicted too. This was largely because hawkish policymaker Kristin Forbes has left the Monetary Policy Committee (MPC) since June.
Probably the biggest disappointment for Pound traders however was the news that the BoE had cut its UK growth and wage growth forecasts.
The growth forecast for 2017 was chopped from 1.9% to 1.7%, with the 2018 forecast dropping to 1.6%. The 2018 wage growth forecast was cut from 3.5% to 3%.
This indicated to traders that the BoE was not confident about the resilience of Britain’s economy, which coupled with slowing inflation has meant investors no longer expect the BoE to take a hawkish stance on monetary policy any time soon.
Sterling was weighed on further by BoE Governor Mark Carney’s dovish tone during a Thursday press conference.
Carney issued multiple fresh warnings on the potential negative effects of the Brexit process on Britain’s economy and warned that the bank would not be able to prevent economic damage.
As for recent data, Markit’s July UK PMIs were mixed. Manufacturing and services actually beat expectations while construction weakened, but as the BoE news was so disappointing Sterling was unable to really benefit from the PMI data.
The Pound outlook is now lower, but due to ‘Kiwi’ weakness GBP NZD has avoided its worst levels.
Next week’s UK data could support the Pound too if it impresses. Britain’s June trade balance will be published next Thursday.
New Zealand Dollar (NZD) Weak on Central Bank Speculation
The New Zealand Dollar has seen poor performance since Wednesday, when New Zealand’s Q2 job market report was published and highly disappointed traders. NZD began to fall from its recent highs as a result.
While the key unemployment rate improved from 4.9% to 4.8% as projected, the employment change figure saw a -0.2% contraction and the participation rate unexpectedly plunged.
The participation rate was forecast to actually improve slightly, from 70.6% to 70.7%, but instead slumped to 70.0% indicating many less citizens were looking for jobs.
August’s first Global Dairy Trade (GDT) auction also disappointed investors. Prices of dairy, New Zealand’s most lucrative commodity, dropped by -1.6% in the auction, worsening concerns that prices of the commodity would continue to fall in the coming months.
Next week will be a big one for New Zealand Dollar trade and could see GBP NZD driven by ‘Kiwi’ movement.
Thursday’s Asian session will see the Reserve Bank of New Zealand (RBNZ) hold its August monetary policy decision.
After the past week’s poor New Zealand data, markets expect the RBNZ is more likely to take a neutral tone towards monetary policy again, rather than indicate that interest rates could be tightened within the foreseeable future.
This would help GBP NZD to advance despite the Pound’s recent weakness.
GBP NZD Interbank Rate
At the time of writing this article, the GBP NZD exchange rate trended in the region of 1.7653. The New Zealand Dollar to Pound exchange rate traded at around 0.5663.
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