A moderate dip in the New Zealand manufacturing PMI helped to boost the Pound New Zealand Dollar exchange rate ahead of the weekend.
Investors were disappointed to find that the manufacturing sector had lost some momentum in June, even though the index remained well within expansion territory.
With risk appetite in general also easing in anticipation of the latest raft of US data the ‘Kiwi’ struggled to find any particular support, to the benefit of the GBP NZD exchange rate.
The Pound may struggle to hold onto its gains against the New Zealand Dollar for long, however, as fresh volatility is likely on the back of the latest UK consumer price index report.
As the Bank of England (BoE) looks set to leave monetary policy on hold at its August meeting, and possibly for some months more to come, any uptick in inflationary pressure is unlikely to encourage market optimism.
Concerns over the increasing squeeze on household finances could see Sterling slump sharply if the CPI shows a further acceleration in inflation in June.
Analysts at ING noted:
‘We’re expecting inflation to stay perilously close to 3% as the effect of the Pound’s depreciation continues to filter its way through to prices. That means inflation will continue to outpace wage growth by almost 1%. Payments firm Visa have suggested that the second quarter was the worst for consumer spending since 2013, although the volatility of official retail sales data means this household squeeze may not be quite so obvious in the latest figures released next week.’
On the other hand, if inflationary pressure eased in June this could offer the GBP NZD exchange rate a fresh boost.
Rising NZ Inflation Could Boost RBNZ Rate Hike Odds
The New Zealand Dollar could find a rallying point, however, if the second quarter New Zealand CPI proves encouraging.
A continued build-up in inflation could encourage the Reserve Bank of New Zealand (RBNZ) to adopt a more hawkish policy outlook, raising the prospect of an interest rate hike coming before the end of the year.
Even so, if the services PMI shows a similar deterioration to the manufacturing figure this could limit the upside potential of the ‘Kiwi’ in the near term.
Risk sentiment could also influence the GBP NZD exchange rate, with the latest raft of Chinese sales and growth data likely to provoke volatility for higher-yielding assets such as the New Zealand Dollar.
If markets continue to lower the odds of the Federal Reserve pursuing an aggressive pace of monetary tightening in the coming months this could equally bolster the appeal of the ‘Kiwi’.