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Could the GBP NZD Exchange Rate Slump Further on UK Borrowing Figures?

August 20, 2017 - Written by Minesh Chaudhari

Even though market jitters mounted ahead of the weekend this was not enough to shore up the Pound New Zealand Dollar exchange rate.

The mood towards the Pound remained distinctly bearish even in the wake of a stronger-than-expected uptick in July’s UK retail sales data.

Although the headline figures were positive, though, the underlying details of the report still pointed towards consumers continuing to rein in their spending as a result of the ongoing wage squeeze.

As analysts at ING noted:

‘Digging a little deeper, much of the strength came from food. Internet and clothing sales - both arguably better bellwethers of consumer's appetite to spend - declined. This latter point tends to support data from Visa and the British Retail Sales consortium, both of which have recently suggested that spending on non-essentials has fallen. A survey by Neilson also suggested that 30% of UK shoppers are switching to cheaper food brands, which could imply that the picture is actually worse in value terms than the latest, more resilient retail sales' volumes currently indicate.’

A downward revision to June’s retail figures also encouraged investors to sell out of Sterling, with market confidence in the underlying health of the UK economy still rather limited.

Demand for the New Zealand Dollar, meanwhile, picked up even as the general mood of investors deteriorated.

While safe-haven demand rose on the back of increasing scepticism over the abilities of the Trump administration this failed to particularly weigh on the ‘Kiwi’, given the corresponding decline in the US Dollar.

With the Federal Reserve looking less likely to achieve a third interest rate hike before the end of 2017 some of the pressure on the New Zealand Dollar eased, as a less hawkish Fed and softer US Dollar bode well for the commodity-correlated currency.

Even in the absence of any fresh New Zealand data this was enough to keep the GBP NZD exchange rate on the back foot during Friday’s European session.

Pound Forecast to Fall if Government Borrowing Mounts

The week could get off to a strong start for GBP exchange rates, however, if the latest public sector net borrowing figure proves positive.

If new government debt fails to rise on the month in July this could encourage greater confidence in the outlook of the UK economy, in the short term at least.

Any signs that the deficit is continuing to widen, though, could diminish the appeal of the Pound even further.

There could also be some volatility for the GBP NZD exchange rate on the back of the second estimate for the second quarter UK gross domestic product.

While no major revision to the initial reading is expected at this juncture Sterling could come under significant pressure if growth is found to have weakened further than initially thought.

Also in focus will be the latest developments surrounding the issue of Brexit, with the Pound still sensitive to speculation over the likely outcome of the negotiation process.

As Richard Franulovich, research analyst at Westpac, noted:

‘The UK govt has detailed plans for a transitional customs arrangement with the EU after March 2019 to allow more time to settle trade deals. The details are welcomed but also call to attention the daunting challenge ahead and raise more questions than answers, e.g. EU rules prohibit negotiating new deals with external countries during the transitional period and any deal requires EU-wide approval (far from given).

‘GBP offers little appeal even after its recent 3%+ multi day correction lower from its highs amid ongoing background negatives including: 1) persistent Brexit vulnerabilities; and 2) a central bank that is clearly in no rush to begin normalising monetary policy judging by its recent projection downgrades.’

In the near term the upside potential of the GBP NZD exchange rate is thus likely to remain rather limited.

The GBP NZD Exchange Rate Could Extend Losses on NZ Trade Data

Volatility is likely in store for the New Zealand Dollar on Wednesday, with the release of July’s trade data.

If the trade surplus narrows once again this could undermine confidence in the New Zealand economy, giving the Reserve Bank of New Zealand (RBNZ) more reason to sit tight for the foreseeable future.

On the other hand, a widening of the trade surplus could encourage the New Zealand Dollar to trend higher across the board, particularly if there is a significant expansion in export volumes.

However, as market sentiment remains rather jittery at this juncture the risk-sensitive New Zealand Dollar may struggle to hold onto any major gains for long.

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TAGS: Currency Predictions Pound New Zealand Dollar Forecasts

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