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GBP NZD Exchange Rate Trends Higher Despite Underwhelming UK Manufacturing PMI

February 1, 2018 - Written by Tim Boyer

In the wake of the Federal Reserve’s latest policy meeting the Pound New Zealand Dollar (GBP NZD) exchange rate found fresh support.

Investors were inclined to sell out of the New Zealand Dollar after Fed policymakers sounded a more optimistic note on the domestic outlook, raising the prospect of a faster pace of monetary tightening.

This naturally weighed on demand for risk-sensitive currencies, leaving NZD exchange rates on the back foot in the absence of any supportive domestic data.

The appeal of the Pound, meanwhile, was not particularly dented in spite of January’s UK manufacturing PMI falling short of forecast.

UK PMIs Could Boost BoE Rate Hike Odds and Pound Exchange Rates



Investors largely shrugged off the negative elements of the PMI report, instead choosing to focus on an increase in export orders.

If international demand for UK products continues to rise this should help to offset some of the detrimental impact of rising input prices, keeping the manufacturing sector in a state of expansion.

All in all, the data did little to diminish market hopes for the Bank of England (BoE) to raise interest rates again in the near future.

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As James Knightley, Chief International Economist at ING, commented:

‘That said the index remains in healthy expansion territory, coming in above the break-even 50 level for the 18th consecutive month. We have also recently seen some better housing data, employment, confidence numbers and of course the above consensus 4Q GDP outturn. Bank of England officials also seem quite keen to tighten policy further at some stage, but there hasn’t been enough to suggest that a hike next week is on the cards. However, if the BoE nudges up its forecasts a touch next week and sound open to further hikes, the current 40% market-implied probability of a May rate hike will rise.

‘A May BoE rate rise is increasingly looking a 50:50 call to us but for now, our House View remains that there won’t be a rate hike this year. The UK economy looks set to grow at half the rate of the US in 2018 and a full percentage point slower than the Eurozone. It should be doing much better given the global upturn in demand and the competitive Sterling exchange rate.’


The corresponding UK construction and services PMIs will also be in focus over the coming days, which could leave the GBP NZD exchange rate vulnerable to the downside.

Any signs of weakening economic growth are likely to dent the appeal of the Pound, particularly if concerns over the likely outcome of Brexit negotiations continue to mount.

RBNZ Policy Meeting Anticipation Forecast to Keep New Zealand Dollar Under Pressure



The ANZ consumer confidence index for January could give the New Zealand Dollar a rallying point tonight, providing sentiment shows an improvement on the month.

Greater domestic confidence would not be enough to alter the policy outlook of the Reserve Bank of New Zealand (RBNZ) but could still shore up NZD exchange rates in the short term.

Another uptick in New Zealand building permits may also offer support to the New Zealand Dollar overnight, even though optimism over the domestic outlook is unlikely to significantly improve at this juncture.

Looking ahead, further jitters are likely for the GBP NZD exchange rate ahead of the RBNZ’s February policy decision.

As analysts at Westpac noted:

‘The past year has been one of unprecedented consistency from the RBNZ. We expect that consistency to continue next week, with no change to the OCR outlook or policy guidance wording.

‘The RBNZ is likely to express its displeasure about the recent rise in the exchange rate, which would elicit a reaction on foreign exchange markets.

‘The other key developments the RBNZ will discuss include surprisingly weak inflation and the renewed vigour of the housing market.

‘We have long argued that inflation will prove lower than the RBNZ expects, and continue to forecast OCR hikes only from late-2019.’


If the RBNZ does opt for a more cautious view on monetary policy the New Zealand Dollar could remain on a bearish trend.
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