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GBP to NZD Exchange Rate Plunges to Multi-Week-Lows on RBNZ Decision

November 9, 2017 - Written by Minesh Chaudhari

An unexpectedly hawkish Reserve Bank of New Zealand (RBNZ) during Thursday’s Asian session caused the British Pound to New Zealand Dollar exchange rate to plunge to new weekly lows. Sterling movement has been mixed due to domestic political uncertainties.

After opening the week at 1.8934 and climbing to a high of 1.9089 earlier in the week, the GBP/NZD exchange rate plunged on Wednesday. By this morning the pair was trending near a three-week-low of 1.8813.

GBP Weakens Amid Rising UK Political Concerns

Wednesday saw the latest in a series of resignations in the UK Conservative Party, as International Development Secretary Priti Patel resigned from her role due to undisclosed meetings she held.

Patel allegedly held meetings with high-ranking Israeli officials during a private holiday, which pressured UK Prime Minister Theresa May to sack her. On Wednesday evening, Patel resigned.

It is the latest in a series of high-profile resignations within the Party, following Defence Secretary Michael Fallon’s resignation last week due to sexual harassment allegations towards him.

On top of these scandals, Prime Minister May is being pressured to sack Foreign Secretary Boris Johnson due to an erroneous statement he made about a British-Iranian woman being held prisoner in Iran. There are concerns that his statements have given Iran more reason to keep her prisoner.

This string of controversies within only a couple of weeks have worsened market concerns that the strength of the UK in Brexit negotiations could be undermined in some way.

With Brexit negotiations resuming before the end of the week, investors are hoping for some progress in talks to be made. However, if the UK government and UK Prime Minister Theresa May’s position is seen as weak, investors fear the UK may not get good post-Brexit deals.

Investors were also disappointed on Thursday by speculation that May is under pressure to replace Patel with another ‘Brexiteer’, to keep balance in the cabinet.

Markets typically prefer officials who advocate a softer Brexit, so this decision could be Pound-negative.

NZD Strengthens as Reserve Bank of New Zealand (RBNZ) Takes Surprisingly Hawkish Tone

Demand for the New Zealand Dollar was boosted overnight and the currency pushed GBP/NZD to new lows on Thursday morning.

The movement was largely due to the unexpectedly hawkish tone of the Reserve Bank of New Zealand (RBNZ), which held its November policy decision during the Asian session.

While the bank left monetary policy frozen as expected and signalled that it would leave monetary policy accommodative for some time, it also upgraded its inflation forecast.

Acting RBNZ Governor Grant Spencer stated that inflation in New Zealand could hit its targets sooner than expected. As a result, he now expects that the RBNZ interest rate will need to be hiked in the second quarter of 2019, rather than the third quarter.

Investors were particularly interested by his optimism towards the new Labour-NZ First coalition government, which has caused significant market uncertainty since it was formed last month. According to Paul Dales from Capital Economics;

‘More interesting than the RBNZ having now left interest rates unchanged for a year, was the Bank's verdict on the impact of the new government,

It believes that GDP growth will be fast for longer, inflation will be higher, the unemployment rate will be lower and interest rates may have to rise a bit earlier in 2019.’

He also indicated that any changes in the RBNZ mandate from the new government were unlikely to have a major impact on the monetary policy outlook, which calmed markets further.

Overall, the RBNZ decision went a ways to calming markets on the uncertainty of the new coalition government and is likely to help the ‘Kiwi’ to sustain gains this week.

GBP/NZD Forecast: Pair to End Lower Unless Brexit News Impresses

The Pound to New Zealand Dollar exchange rate is on track to end the week below its opening levels due to political uncertainty in Britain and stronger market confidence in New Zealand following the latest Reserve Bank of New Zealand (RBNZ) decision.

However, the pair still has the opportunity to advance, depending on how upcoming Brexit negotiations play out.

UK and EU negotiators will meet in Brussels again before the end of the week and markets are hoping there will be signs of acceleration in talks.

Any signs that UK-EU talks are advancing and nearing the end of the first negotiation phase would likely lead to a surge in Pound demand.

However, signs of further complications or obstacles would likely lead to more gains for the New Zealand Dollar and the pair would end the week lower.
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