Could GBP NZD Exchange Rate Extend its Gains Further on More Hawkish BoE Commentary?

September 17, 2017 - Written by John Cameron

STORY LINK Could GBP NZD Exchange Rate Extend its Gains Further on More Hawkish BoE Commentary?

Ahead of the weekend the Pound to the New Zealand Dollar exchange rate made strong gains in response to the latest commentary from the Bank of England (BoE).

Investors were encouraged to pile into the Pound in the wake of the BoE’s meeting minutes, even though policymakers still voted 7-2 in favour of leaving interest rates unchanged.

The unexpectedly hawkish nature of the minutes, which noted that some tightening of monetary policy could be appropriate in the coming months, prompted Sterling to surge higher across the board.

Subsequent confident comments from BoE policymaker Gertjan Vlieghe, previously one of the most dovish members of the Monetary Policy Committee (MPC), gave markets further reason to price in the possibility of a November or December rate hike.

The mood towards the New Zealand Dollar, meanwhile, diminished in response to the latest developments in Asia.

As North Korea launched another missile over Japan this prompted a fresh bout of market risk aversion, with global geopolitical tensions escalating further in response to this latest provocation.

This sent the GBP NZD exchange rate to a sixteen-week high of 1.8685 during Friday’s European session, shrugging off much of the ongoing worries over Brexit.

BoE Rate Hike Speculation to Dominate Pound Outlook

Comments from BoE Governor Mark Carney will be in focus on Monday, with investors hoping for continued hawkish signals to boost the odds of an imminent interest rate hike further.

If Carney echoes the sentiment of the meeting minutes this could push the Pound higher across the board, even if he does emphasise the conditional nature of any such move.

However, as Viraj Patel, foreign exchange strategist at ING, noted:

‘We are inclined to see the primary goal of the Bank’s hawkish signal as an attempt to realign market expectations with the idea of a gradual BoE tightening path, rather than preparing markets for an imminent rate rise.

‘The latter, as the policy statement caveats, remains a function of how the UK economy evolves over the coming months; the added layer of heightened UK political uncertainty – stemming from crucial Brexit-related events in the next few months – means that a November rate hike shouldn’t be viewed as a sure fire bet.

‘Indeed, we’d like to think underlying the BoE’s message was the subtle tactic of ‘extremeness aversion’ – offering an extreme option (in this case potential near-term rate hikes) to anchor markets more towards the middle ground (slightly higher rates at some point over the next few years).’

If August’s UK retail sales data points towards a weakening in consumer confidence this could undermine some of the Pound’s recent strength.

With consumers already under pressure thanks to the combination of poor wage growth and accelerating inflation any signs that this squeeze is impacting the wider economy is unlikely to encourage investors.

As the UK economy relies on strong levels of consumer spending to drive much of its growth a weaker showing here could provoke a sharp dip for the GBP NZD exchange rate, diminishing the likelihood of an imminent move from the BoE.

Strong Second Quarter Growth May Boost NZD

Demand for the New Zealand Dollar could pick up this week if the second quarter New Zealand gross domestic product proves encouraging.

Any signs that the domestic economy is continuing to grow at a solid pace are likely to improve the appeal of the ‘Kiwi’.

This could give the Reserve Bank of New Zealand (RBNZ) further cause for confidence, particularly if signs point towards a slower pace of monetary tightening from the Federal Reserve.

If growth fails to strengthen as far as forecast, though, this is likely to give the GBP NZD exchange rate a greater degree of support.

Developments in the Korean situation are also likely to impact the strength of the New Zealand Dollar going forward, with any fresh deterioration set to weigh heavily on NZD exchange rates.

Unless tensions are seen to calm at least somewhat in the short term this is set to remain a significant downside pressure on the risk-sensitive ‘Kiwi’.

Jitters over the New Zealand election are also expected to limit the upside potential of the antipodean currency this week.

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