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GBP NZD Exchange Rate Rally Forecast Ahead of Dovish RBNZ Policy Meeting

August 8, 2017 - Written by Frank Davies

A fresh bout of Brexit-based uncertainty helped to keep the Pound New Zealand Dollar exchange rate under pressure at the start of the week.

Clarity over the likely outcome of negotiations remained distinctly lacking as a result of conflicting reports regarding the size of the UK’s divorce bill, and what the government might be willing to pay.

This limited the appeal of the Pound, particularly as the latest Halifax house price index pointed towards a loss of momentum within the UK housing market.

With markets increasingly concerned by the government’s approach towards the Brexit process the outlook for both the UK economy and Sterling seems distinctly muted at this juncture.

Although a sense of wider market risk aversion limited demand for the New Zealand Dollar, alongside disappointing Chinese trade data, this was not enough to shore up the GBP NZD exchange rate.

New Zealand Dollar Vulnerable Ahead of RBNZ Meeting

However, the mood towards the ‘Kiwi’ is likely to deteriorate significantly if the Reserve Bank of New Zealand (RBNZ) proves dovish at its August policy meeting.

Following a slight moderation in the RBNZ’s two-year inflation expectation survey for the third quarter the chances of the central bank taking a more optimistic view on monetary policy seem slim.

As Cameron Bagrie, Chief Economist at ANZ, noted:

‘The overall inflation picture remains suppressed outside of the usual suspects, namely housing and anything related to housing. That said, the fact that we are now starting to see more groups showing price rises and fewer showing price falls is something that needs to be watched.

‘Low inflation means the OCR is set to stay put at 1.75% for a long time.’

With global commodity demand weakening the outlook for the New Zealand economy does not appear entirely encouraging, particularly as safe-haven demand picks up in response to global geopolitical tensions.

Given rising doubts over the likelihood of the Federal Reserve achieving a third interest rate hike before the end of the year the pressure on both the RBNZ and NZD exchange rates has still somewhat eased.

Even so, despite the recent softness of the New Zealand Dollar the potential for further losses on the back of the RBNZ meeting remains.

Peter Dragicevich, research analyst at Nomura, noted:

‘We see a possibility the Bank may express some more explicit dovish leanings because of the subdued inflation backdrop and elevated NZD. We continue to think that too much optimism is priced into the NZD near current levels. And given the bullish skew in NZD positioning, the risk of a retracement has risen.’

Analysts at Westpac anticipate a slightly less dovish showing, meanwhile, commenting:

‘Developments since the May MPS have been net negative relative to the RBNZ’s forecasts: weaker GDP, inflation, house prices, and a higher NZD; only partly offset by stronger export prices, fiscal policy and migration.

‘We expect the OCR forecast to be flattened (removing the rise in early 2020) but the policy guidance paragraph to be largely unchanged.’

Either way this could offer the GBP NZD exchange rate a strong rallying point, particularly if Governor Graeme Wheeler follows up with a more dovish message in his appearance before the Parliament Select Committee.

On the other hand, if the central bank opts for a more confident outlook the New Zealand Dollar could find fresh support during Wednesday’s Asian session.

GBP Forecast: UK Trade and Production Data in Focus

Volatility is likely in store for the Pound later in the week with the release of the latest raft of UK production and trade data.

Forecasts point towards an improvement on the month, with both manufacturing and construction output thought to have picked up after a disappointing performance in May.

Any downside surprises here could leave GBP exchange rates under increased pressure, particularly if June’s visible trade deficit is found to have widened.

Focus will also fall on the NIESR gross domestic product estimate for the three months to July, which is expected to show that growth held steady at a modest 0.3%.

If GDP is suggested to have dipped once again, though, this may encourage the Pound to shed further ground against its rivals.
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