GBP NZD Exchange Rate Struggles for Momentum After Solid NZ Services PMI

February 19, 2018 - Written by Ben Hughes

STORY LINK GBP NZD Exchange Rate Struggles for Momentum After Solid NZ Services PMI

With global stock markets rather quiet at the start of the week the Pound New Zealand Dollar (GBP/NZD) exchange rate was unable to find any particular direction, trending in a narrow range instead.

Although the Rightmove house price index showed a slight improvement in February this failed to bolster demand for the Pound, given the rather sluggish nature of market sentiment today.

A slight dip in the New Zealand services PMI limited the strength of the New Zealand Dollar, meanwhile, even though the sector remained in a robust state of growth at the start of 2018.

In the absence of any significant market sentiment, however, this data had little particular impact on the GBP/NZD exchange rate.

Stronger UK Wage Growth Could Boost Pound New Zealand Dollar Exchange Rate

Greater volatility is likely in store for the GBP/NZD exchange rate ahead of Wednesday’s raft of UK labour market data, however.

While forecasts point towards average weekly earnings holding steady at growth of 2.4% on the year in the three months to December this could still offer support to the Pound.

An upside surprise here would give GBP exchange rates a solid boost, encouraging Bank of England (BoE) policymakers to take a more optimistic view of the economic outlook.

Wage growth remains perhaps the most influential data on the BoE’s policy direction at this juncture, given the ongoing squeeze that has been caused by the recent rise in domestic inflation.

As a result, better-than-expected growth in earnings could raise the odds of the BoE raising interest rates again in the coming months.

In the wake of Friday’s lacklustre retail spending results a positive showing would be even more welcome, as James Smith, Developed Markets Economist at ING, commented:

‘True, wage growth has been performing better recently, giving the Bank of England increased confidence that the tight labour market is prompting firms to offer more generous pay packets. That said, it’s still early days, and we think there remains a risk that some firms take a more cautious stance, amidst slower economic momentum and elevated uncertainty. At the same time, food and fuel costs are continuing to rise, even though in general consumer prices have largely adjusted to the post-Brexit weakening in the Pound.

‘When it comes to the outlook for interest rates though, it's worth remembering that the Bank of England has already factored much of this weakness into their assessment of UK growth.

‘Assuming the next couple of wage growth readings continue to paint an improved picture, we think policymakers will have enough confidence to hike rates in May - although of course, this remains heavily contingent on progress in the Brexit negotiations.’

Commentary from various BoE policymakers will also be in focus this week, with markets likely to react to any perceived signals on the subject of interest rates.

New Zealand Dollar Vulnerable to Disappointing Producer Price Data

Tonight’s fourth quarter New Zealand producer price index data could offer a boost to the New Zealand Dollar, meanwhile.

Any signs that inflationary pressure within the New Zealand economy is still building could encourage NZD exchange rates to rally once again.

While even a strong upside surprise here is unlikely to be enough to materially alter the outlook of the Reserve Bank of New Zealand (RBNZ), which looks set to remain on hold for some time to come, this could still improve the appeal of the New Zealand Dollar.

On the other hand, an easing in price pressures would put NZD exchange rates under fresh pressure, highlighting the likelihood of policymakers maintaining a neutral to dovish bias well into 2019.

In fact, as analysts at Westpac noted:

‘We have warned that although an OCR cut this year is not likely, it remains a possibility. Indeed, given our views on GDP growth, we regard a cut in the OCR this year as more likely than a hike.’

Unless New Zealand data impresses over the coming days the New Zealand Dollar may struggle to find any traction, especially if the general sense of market risk appetite remains limited.

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TAGS: Pound New Zealand Dollar Forecasts