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GBP NZD Exchange Rate Holds Uptrend Ahead of UK Inflation Data

October 16, 2017 - Written by Frank Davies

In spite of the ongoing sense of uncertainty surrounding Brexit negotiations the Pound New Zealand Dollar exchange rate was able to regain further ground at the start of the week.

Investors took some encouragement from news that Theresa May will be meeting with EU chief negotiator Michel Barnier and European Commission President Jean-Claude Juncker over dinner.

While the chances of the ‘deadlock’ over the UK’s exit bill being broken at this stage seem fairly slim this was still enough to bolster the appeal of the Pound on Monday morning.

Even so, the GBP NZD exchange rate struggled to gain significant traction thanks to the relative strength of the ‘Kiwi’.

Demand for the commodity-correlated New Zealand Dollar strengthened in response to better-than-expected Chinese inflation data, which added to the more optimistic impression of the global economic outlook.

As the New Zealand services PMI also remained in strong growth territory this helped to bolster the appeal of the antipodean currency.

Higher UK Inflation to Increase BoE Rate Hike Odds

Confidence in the Pound could falter, however, ahead of Tuesday’s UK consumer price index data, which could impact the outlook of the Bank of England (BoE).

Forecasts point towards a fresh uptick in inflationary pressure from 2.9% to 3% on the year, an acceleration that would give policymakers further reason to consider raising interest rates in November.

As the BoE has expressed limited tolerance for elevated inflation the prospect of a rate hike is likely to increase if price pressures continue to pick up, even if this is still thought to be primarily tied to the post-referendum fall in the Pound.

However, even if inflation surprises to the downside this may not be enough to dampen the odds of an imminent rate hike.

But, with markets already pricing in relatively high odds of the BoE tightening monetary policy in November, the downside potential of the GBP NZD exchange rate is still significant.

Even so, as analysts at Rabobank noted:

‘Over the next couple of weeks the market will be turning its attention back to the BoE’s November policy meeting. The market is mostly prepared for a rate hike, though there remains a lot of doubt as to whether the economic outlook justifies a move. We have previously argued that Carney’s hawkish commentary in September was aimed at stabilising the Pound and that he had some success in doing this until the UK political backdrop soured in early October. However, if a November rate hike is accompanied by further signs that UK growth is sluggish, the market will assume (as we do) that the BoE may not be able to follow any policy move for a prolonged period. This suggests that while a November rate hike may have removed some downside potential for the Pound, it is unlikely to be able to completely counter the political and growth risk that are undermining the Pound.’

So long as BoE Governor Mark Carney and his fellow policymakers maintain a relatively upbeat tone in their appearance before the Treasury Committee, though, the Pound should be able to hold onto some of its recent gains.

New Zealand Dollar Benefits as Political Uncertainty Eases

With sources suggesting that New Zealand’s next government could be confirmed by the end of the week NZD exchange rates could see further gains in the near term.

After the inconclusive nature of the recent election the New Zealand Dollar has been weighed down by an increased sense of political uncertainty, creating the potential for a solid rally once the shape of the new government becomes clear.

Support could also be in store for the ‘Kiwi’ if tonight’s third quarter consumer price index data proves encouraging.

As inflation is thought to have accelerated 0.4% on the quarter this could improve confidence in the underlying health of the New Zealand economy, increasing the chances of the Reserve Bank of New Zealand (RBNZ) returning to a more optimistic outlook.

On the other hand, if the CPI falls short of forecast this may weigh heavily on market sentiment and offer the GBP NZD exchange rate a fresh boost.
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