BoE Rate Hike Prospects Prompt Surge in Pound (GBP) Exchange Rates
The near-term outlook for the Pound Sterling New Zealand Dollar (GBP/NZD) grew increasingly positive on Tuesday as markets priced in the possibility of a Bank of England (BoE) rate hike in May.
Investors are currently expecting hawkish comments from BoE Governor Mark Carney as he prepares for his first major UK appearance of 2018, with money markets assigning a 50% chance of another quarter-point rate hike in May and 80% chance for a rate hike by August.
Both of these assessments have climbed since the central bank’s previous meeting in December, improving in 2018 on the back of robust jobs and growth statistics.
Carney, known for having a gloomy outlook on Brexit, is due to appear today before the Lord’s Economic Affairs Committee to face questions on a variety of topics, and having previous asserted that more rate hikes would be needed over the coming years to contain domestic price pressures, it is likely that he will be quizzed on these expectations.
If Carney’s outlook remains optimistic then the GBP/NZD exchange rate could extend its rally.
A dovish outlook, however, could keep the Pound in the mud.
Massive New Zealand Trade Surplus Bolsters NZD Exchange Rate Outlook
The New Zealand Dollar (NZD) found some support on Monday after New Zealand posted their biggest monthly trade surplus in over two-and-a-half years.
Official figures from New Zealand revealed a surplus of $640 million in December – the highest December reading on record.
This smashed the expected deficit reading of -125m and the previous reading of -1233m, with soaring values in the export of dairy products driving total exports sky-high.
Tehseen Islam, International Statistics Manager shared his thoughts on the readings:
‘Record export values of dairy products drove total exports to their highest-ever monthly value. The previous highest values for both dairy exports and total exports were recorded in the 2013-14 dairy export season, when dairy prices were at a high level’.
In other news, the credit rating agency S&P reaffirmed its rating of the New Zealand economy as AA/A-1+, successfully offsetting some investor concerns that the new government’s foreign policies would ruin the rating.
New Zealand Finance Minister Grant Robertson echoed this sentiment, asserting that it keeps things broadly on track for the government’s Budget Policy Statement (BPS).
Brexit Optimism in 2018 – What can Markets Expect for the GBP/NZD Exchange Rate?
The Pound has seen a resurgence in demand in 2018, bolstered by renewed optimism for a bespoke trade deal and the likely successful negotiation of a two-year ‘transitionary’ period; something that would effectively eliminate the cliff-edge for increasingly anxious businesses.
Looking ahead, the British government aims to have an agreement regarding the divorce and, at the bare minimum, an outline for their future trading relationship ready within 10 months, though Brussels and London still have slightly different ideas about exactly what this should entail.
The Chief Brexit Negotiator of the European Union, Michel Barnier, has warned Britain that it will have to accept all EU laws, including new regulations and the supremacy of the European Court of Justice during the proposed transition period.
This would occur despite the UK being stripped of its EU voting rights and representation in Brussels’ institutions and agencies.
David Davis, the UK Brexit Secretary has pointed out that this is one of several areas where the UK and the EU would not agree regarding the transition, though he has not yet raised these issues in negotiations.
If these issues are not ironed out quickly during this negotiation phase then trade talks could be delayed beyond March, an outcome that could limit the GBP/NZD exchange rate.
If these issues are quickly resolved, however, then the Pound New Zealand Dollar (GBP/NZD) exchange rate could extend its rally.