As headline UK inflation accelerated to a four-year high of 2.7% the mood towards the Pound soured, with the squeeze on domestic living standards looking set to persist.
With the Bank of England (BoE) likely to maintain its neutral policy bias for the foreseeable future this uptick failed to encourage investors.
Given the weakness of recent production and trade data the health of the UK economy remains questionable, raising concerns as Brexit negotiations are still yet to get underway.
The appeal of Sterling could weaken further if the latest earnings data indicates that wage growth continues to rise at a significantly slower pace than inflation.
While forecasts point towards the unemployment rate having remained steady at 4.7% in the three months to March this is unlikely to offer the Pound New Zealand Dollar exchange rate a rallying point.
As high levels of consumer spending are responsible for much of the UK economy’s resilience, any increased pressure on household finances is likely to put a significant dampener on investor confidence.
However, April’s retail sales figures could provide a boost for the Pound, with sales thought to have rebounded sharply on the month.
Stronger sales may limit the downside bias of GBP exchange rates in the short term, although the outlook of the wider economy remains less-than-encouraging.
Demand for the New Zealand Dollar picked up somewhat in the wake of a solid GlobalDairyTrade auction, meanwhile.
As dairy prices picked up further the appeal of the commodity-correlated currency improved, particularly with markets in a more risk-on mood following China’s major pledge on infrastructure investment.
The ‘Kiwi’ struggled to hold onto its gains for long, though, as the latest political scandal in the US encouraged investors to sell out of more risk-sensitive assets on Wednesday morning.
Further vulnerability is expected for commodity prices, as Con Williams, rural economist at ANZ, noted:
‘Dairy markets will remain volatile. While reduced supply lifted prices in late-2016, supply indicators are pointing higher. The commodity complex globally still looks vulnerable to a turn in the reflation trade (which we have arguably seen in some pockets), though each commodity will be influenced by its own supply/demand characteristics.’
With the Reserve Bank of New Zealand (RBNZ) looking set to leave interest rates on hold for some time to come the upside potential of the ‘Kiwi’ may remain limited.
Even so, if Friday’s credit card spending data indicates greater consumer confidence the GBP NZD exchange rate could come under fresh pressure.