Rising UK Inflation Boosts Pound New Zealand Dollar Exchange Rate
The Pound to New Zealand Dollar (GBP/NZD) exchange rate found traction on the back of the surprise improvement in the UK inflation rate.
While forecasts had pointed towards the headline inflation rate dipping to 0.5% it instead strengthened to 0.7% on the year.
This gave investors fresh incentive to favour Pound Sterling (GBP) over its rivals, even as the monthly inflation rate still turned negative in January.
With inflationary pressure showing signs of picking up the case for any imminent Bank of England (BoE) policy action appeared to diminish, encouraging GBP exchange rates to trend higher.
However, as earlier optimism over the success of the UK’s Covid-19 vaccine rollout started to fade this limited the potential for any fresh GBP/NZD exchange rate gains.
New Zealand Dollar Under Pressure amid Lack of Risk Appetite
As the general sense of market risk appetite generally weakened on Wednesday this put a fresh dampener on the New Zealand Dollar (NZD), meanwhile.
In the absence of any particular sense of market optimism and in the face of a stronger US Dollar (USD) there appeared little reason to favour the ‘Kiwi’ at this stage.
Growing doubts over the resilience of the New Zealand economy also helped to keep NZD exchange rates on a weaker footing this week.
Following the underwhelming nature of the latest services PMI investors have taken a less optimistic view on the health of the New Zealand economy, especially in the face of the ongoing pandemic.
Even so, the New Zealand Dollar could find some cause for confidence if the fourth quarter producer price index data proves encouraging.
Evidence of strengthening prices could see the GBP/NZD exchange rate shedding fresh ground ahead of the weekend.
Weaker UK Services PMI Forecast to Weigh on Pound Demand
On the other hand, the mood towards the Pound could sour on Friday unless February’s UK manufacturing and services PMIs exceed expectations.
With the service sector forecast to remain trapped in a state of contraction, with the PMI remaining well below the neutral baseline of 50, GBP exchange rates look vulnerable to fresh selling pressure.
As long as the service sector continues to underperform the risk of a weaker first quarter gross domestic product reading looks set to grow.
Given that the service sector remains the primary contributor to the UK GDP any weakness here would significantly increase the likelihood of a negative first quarter reading.
However, if the manufacturing sector can hold onto a strong trend of growth this could help to limit the negative impact of the services PMI and keep a floor under the Pound to New Zealand Dollar exchange rate.