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GBP NZD Exchange Rate Rally Seen despite Gathering Economic Storm Clouds

July 14, 2017 - Written by Toni Johnson

While the GBP NZD rise to 1.7763 today is the best rate since Thursday, it is still low in comparison to the 1.7893 exchange rate recorded on July 11th.

Pound Traders Fall Back on McCafferty Comments to Trigger GBP Rally

The strongest source of support for the Pound today actually came earlier in the week, when Bank of England (BoE) official Ian McCafferty spoke on Thursday.

The often-hawkish policymaker reiterated that he supported raising UK interest rates and also added that the BoE balance sheet could start unwinding soon.

This would consist of unwinding the BoE’s quantitative easing program, which would be a strong sign of confidence in UK economic stability.

Elsewhere, however, there have been storm clouds forming over the UK. On the one hand, the Office of Budget Responsibility (OBR) has delivered a damning assessment of the UK’s economic resilience.

Additionally, it has become apparent that the government’s attempts to pass the Great Repeal Bill may be met with stiff opposition.

The bill needs to be passed before the government can start converting EU laws to UK ones, but opposition MPs have entrenched themselves against this action.

Particular objection has come from the devolved administrations, which claim that passing the bill will result in the watering down or even removal of their powers.

New Zealand Dollar Tumbles after Report Highlights Danger of Lower Immigration

On a slow data day for New Zealand, the NZD has been weakened recently by data concerning the effect of immigrants.

Amid rising political impetus to impose stricter immigration controls, Gareth Kiernan of Infometrics has stated that;

‘Without these inflows of foreign workers and returning New Zealanders, businesses would have struggled to meet growing demand [in 2016], and cost pressures would be even more intense in areas such as the construction and tourism sectors. Given the slowdown already occurring in sales activity and house price growth, this potential cocktail of rising interest rates mixed with a government clampdown on migration would be lethal.

Faster lifts in mortgage rates and debt-servicing costs would threaten a jump in forced house sales, hastening a correction in the housing market and hammering consumer confidence. We need to take more of a softly-softly approach [to immigration] than some of the politicians are advocating’.

GBP NZD Forecast: Sterling Slip Possible on Greater UK Wage Squeeze

Looking ahead to the coming week, the Pound may be unsettled by Tuesday’s inflation rate figures for June.

On a basic level, annual inflation is forecast to dip from 2.9% to 2.7%, while on the month a drop from 0.3% to 0.1% is predicted.

Both of these results will likely be considered in the context of UK wage growth, stats for which came out on July 12th. In May, average earnings fell to 1.8% with bonuses but rose to 2% without bonuses.

In either case, this leaves inflation far above the pace of wage growth, which means UK consumers are continuing to struggle with reduced ‘real incomes’.

If both inflation measures rise against forecasts, the Pound could appreciate, as higher CPI could put further pressure on the Bank of England (BoE) to raise UK interest rates.

That said, BoE policymakers have been divided on the idea of raising rates, so the Pound may conversely dip. This is because traders could conclude that the BoE is too concerned about an interest rate hike triggering a wave of credit defaults.

With low interest rates and shrinking real incomes, consumers have been taking out loans with low repayment costs. Raising interest rates could combat rising inflation but would also raise repayment costs on previously affordable loan and mortgaging plans.

The next notable NZ data will come on Sunday, consisting of a measure of services sector activity in June. Predictions are for a slight decline, but nowhere near enough to trigger worries about sector contraction.

The greater influence could be had by Monday’s inflation rate stats, along with Tuesday’s Global Dairy Trade price index.

In the former case, inflation is predicted to fall on the year and the quarter in Q2. This may weaken the NZD on fears of unchanged monetary policy in the future. Further ahead, a subsequent rise in dairy prices could erase any losses and trigger an NZD GBP rally.
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