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Mid-Week Pound to New Zealand Dollar Outlook: NZ Election Jitters Limit NZD Upside

September 13, 2017 - Written by David Woodsmith

The pound to New Zealand dollar exchange rate remains on a negative bias on Thursday 14th September, quoted at 1.82277 (07:30 GMT).

After making strong gains in the wake of the latest UK inflation data GBP/NZD returned to a weaker footing.

While the Pound surged higher across the board on Tuesday it struggled to sustain this bullishness for long, with stronger inflation likely to put pressure on the domestic economy.

Even so, the mood towards Sterling remains somewhat optimistic as investors brace for tomorrow’s Bank of England (BoE) interest rate decision.

With hopes of an increased hawkishness amongst policymakers boosted the September meeting looks set to provoke further volatility for the GBP NZD exchange rate.

Confidence in the New Zealand Dollar, on the other hand, picked up further in response to a solid uptick in August’s food price index.

This added to evidence that inflationary pressure within the New Zealand economy is building, following on from a strong rebound in the ANZ truckometer measure.

Naturally this encouraged optimism in the domestic outlook, encouraging investors to pile back into the ‘Kiwi’ amidst a more general improvement in market risk appetite.

Weak Wage Growth Dents BoE Rate Hike Odds

There was ultimately disappointment as UK average weekly earnings failed to rise as far as forecast in the three months to July.

With pay growth still lagging seriously behind inflation at 2.1% on the year as opposed to August’s 2.9% inflation rate this indicates that the squeeze on household finances is likely to continue apace.

As markets had anticipated a slightly more robust uptick of 2.3% in earnings this exacerbated the downside pressure on the Pound, undermining the optimism seen on Tuesday.

This prompted the GBP NZD exchange rate to extend its downtrend further this morning, with this weaker showing seeming to diminish the odds of an imminent BoE interest rate hike.

Even though the UK unemployment rate also fell to a fresh 42-year low this was not enough to outweigh the negative impact of the wage data.

The mood towards the Pound is likely to remain muted ahead of the BoE meeting as a result, although the potential for a sharp rally remains.

Investors could pile back into Sterling if the meeting does prove to be more hawkish in nature, even if the odds of interest rates rising before the end of the year remain relatively slim.

Analysts at ING noted:

‘The risks of a ‘hawkish hold’ this week – and a third rate hike dissenter joining the ranks – have increased; in the scenario of a 6-3 MPC vote split, the initial knee-jerk market reaction could see odds of a Nov BoE rate hike rise to 50%. But with the UK political environment over the next three months anyone's guess, we believe such hawkish BoE steps, if anything, should be viewed as teeing up markets for a 1H18 rate hike. Moreover, any hawkish re-pricing in the UK rate curve is only likely to offer the pound a one-time boost; we would expect Brexit to once again recapture the narrative for GBP price action in Oct ahead of key political events.’

If the BoE continues to adopt a relatively dovish tone on monetary policy the GBP NZD exchange rate could cede further ground ahead of the weekend.

Election Jitters Limit NZD Upside

Tomorrow’s ANZ consumer confidence index could encourage the New Zealand Dollar to return to a bullish run, providing that the reading proves positive.

Any fresh uptick in domestic sentiment could improve confidence in the outlook of the economy, giving the Reserve Bank of New Zealand (RBNZ) less reason to adopt a dovish policy bias.

On the other hand, a weaker showing here could weigh heavily on the ‘Kiwi’, particularly if the wider sense of market risk appetite deteriorates once again.

The appeal of the New Zealand Dollar is also likely to remain tempered by jitters surrounding the approaching election, with the race looking rather tighter than initially expected.

With markets wary of any change in the political landscape this could help to support the GBP NZD exchange rate in the coming days.
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