Dip in UK Inflation Limits Pound Sterling New Zealand Dollar (GBP/NZD) Exchange Rate Upside
As the headline UK consumer price index fell back as forecast the Pound Sterling to New Zealand Dollar (GBP/NZD) exchange rate saw limited support.
With the annual inflation rate clocking in at 2.0%, matching the Bank of England’s (BoE) target rate, the case for an imminent interest rate hike diminished.
This left Pound Sterling (GBP) on a generally muted footing as investors reassessed the odds of the BoE making a policy move before the end of the year.
Even so, this dip in inflation still bodes well for UK households as wage growth continued to outpace inflation in May.
While Brexit-based uncertainty still casts a shadow over the economic outlook this was not enough to put the GBP/NZD exchange rate into reverse on Wednesday morning.
Current Account Surplus Fails to Boost NZD Exchange Rates
A better-than-expected first quarter current account balance was not enough to shore up the New Zealand Dollar (NZD), meanwhile.
Although the current account returned to a state of surplus in the first three months of the year this was not enough to outweigh the impact of the previous quarter’s deficit.
As a result, the current account gross domestic product ratio remained firmly in negative territory at -3.6%, leaving NZD exchange rates on the back foot.
However, the mood towards the New Zealand Dollar could pick up sharply if the Federal Reserve takes a dovish stance at its latest policy meeting.
Signs that the Fed is set to cut interest rates in the near future would offer support to the risk-sensitive New Zealand Dollar as demand for the US Dollar (USD) falls.
A positive showing from the first quarter New Zealand gross domestic product may also encourage NZD exchange rates to recover some ground.
Pound Sterling (GBP) Looks for Rallying Point on BoE Policy Announcement
GBP exchange rates could find a stronger rallying point on the back of Thursday’s BoE policy announcement and meeting minutes.
If policymakers appear to lean towards raising interest rates before the end of the year the mood towards the Pound is likely to see an improvement.
On the other hand, in the wake of the weaker inflation data the BoE could opt to take a more cautious outlook once again.
As analysts at Citigroup noted:
‘The BOE raised GDP expectations across the forecast horizon earlier. A Brexit deal (or longer extension) is a likely precondition to any hike in 2019. However, the political backdrop remains the biggest risk to GBP.
‘We no longer see a Bank Rate hike in August or indeed this year as likely, as no-deal could become a bigger risk quickly, with the dovish wind blowing through global monetary policy.’
Any evidence that the BoE could leave monetary policy on hold for the foreseeable future would leave the GBP/NZD exchange rate exposed to fresh selling pressure.