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Pound Strengthens Against New Zealand Dollar After Dovish RBNZ Rate Hold

New Zealand Dollar Currency Forecast

After the Reserve Bank of New Zealand (RBNZ) opted to leave interest rates on hold overnight the Pound regained some of its ground against the New Zealand Dollar.

The mood towards the ‘Kiwi’ remained generally muted as Acting Governor Grant Spencer noted that monetary policy will stay accommodative for some time to come.

As the central bank also took a more cautious view on the economic outlook this gave investors little incentive to buy into the risk-sensitive New Zealand Dollar at this juncture.

Dominick Stephens, Chief Economist at Westpac, noted:

‘The RBNZ did not acknowledge the fact that house prices have been much weaker than its previous forecast, presumably because it is wary of a post-election market resurgence.

‘In our view, the weak housing market and stalled construction sector will cause the RBNZ to strike a more dovish tone at the November MPS, unless the exchange rate falls sharply.

‘We remain firmly of the view that market pricing for an OCR hike in 2018 is far too early. We forecast the OCR to remain unchanged until late-2019, with evenly balanced risks to that flat forecast.’

With domestic political uncertainty still heightened in the wake of Saturday’s inconclusive election the GBP NZD exchange rate could remain biased to the upside in the near future.

Unless markets see signs that things are returning to the status quo the New Zealand Dollar may struggle to find any particular support against its rivals.

Weaker BoE Rate Hike Odds Could Weigh on GBP

Confidence in the Pound could weaken, however, with the conclusion of the fourth round of Brexit talks.

As UK and EU negotiators still appear to have made no real progress towards an agreement on key issues, such as the Irish border and the rights of EU citizens, markets are less than optimistic.

If Brexit-based uncertainty continues to cast a shadow over the domestic economy then the GBP NZD exchange rate could return to a downtrend, with a significant portion of the two-year negotiating timeframe already gone.

On the other hand, if markets remain confident that the Bank of England (BoE) will raise interest rates before the end of the year this is likely to limit the downside potential of the Pound.

Friday’s net consumer credit figure could undermine the case for imminent policy tightening, though, if it shows a fresh uptick on the month.

Given the concerns that UK households are showing an increasing reliance on credit as the wage squeeze deepens a strong showing here could dampen the appeal of a 2017 rate hike.

However, confirmation that the economy grew by 0.3% in the second quarter may be enough to limit any Pound weakness ahead of the weekend.