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Pound New Zealand Dollar (GBP/NZD) Exchange Rate Slumps as Initial UK-EU Trade Talks Optimism Fades

October 22, 2020 - Written by Frank Davies

Hopes of UK-EU Trade Deal Fails to Extend Pound New Zealand Dollar Exchange Rate Gains

After hitting a six-week high in response to improved chances of a UK-EU trade deal the Pound Sterling to New Zealand Dollar (GBP/NZD) exchange rate returned to a weaker footing.

While the two sides returned to the negotiating table the Pound was unable to hold onto its initial bout of optimism, with the potential for a no-deal scenario still lingering.

This diminished the impact of the CBI industrial trends orders index, even as it unexpectedly picked up from -48 to -4 on the month.

Even with the UK economy showing fresh signs of recovering some of the growth momentum lost during the Covid-19 crisis the appeal of the Pound still proved limited on Thursday.

The New Zealand Dollar found support, meanwhile, as signs of potential progress towards a Covid-19 vaccine encouraged a bout of market risk appetite.

Rising New Zealand Inflation Set to Boost New Zealand Dollar Appeal

The mood towards the New Zealand Dollar could see further improvement tonight if the third quarter inflation rate improves as forecast.

Markets expect to see the headline inflation rate pick up from 1.5% to 1.7% on the year, edging closer to the Reserve Bank of New Zealand’s (RBNZ) inflation target.

With the quarterly inflation rate also expected to return to positive territory after contracting -0.5% in the second quarter NZD exchange rates could find a solid rallying point here.

Signs of stronger inflationary pressure within the New Zealand economy could add to existing market confidence in the relative resilience of the country in the face of the global Covid-19 crisis.

Rising inflation would give the RBNZ less incentive to cut interest rates in the months ahead, limiting the potential for New Zealand Dollar losses.

However, any fresh souring in market sentiment could still see NZD exchange rates return to the back foot once more as fears of a renewed global slowdown persist.

Softer UK PMIs Forecast to Limit GBP/NZD Exchange Rate Strength

With forecasts pointing towards a dip in both October’s flash UK manufacturing and services PMIs support for the Pound looks set to fade further.

Although both PMIs are forecast to remain above the neutral baseline of 50, showing solid expansion on the month, any signs of a slowdown could still put pressure on GBP exchange rates.

Evidence that the economy remained vulnerable at the start of the fourth quarter may leave the Pound exposed to selling pressure.

A disappointing showing from September’s set of UK retail sales figures could equally drag on the GBP/NZD exchange rate ahead of the weekend.

Signs that consumer spending started to moderate last month may fuel renewed anxiety over the likelihood of a weaker third quarter growth rate, exposing the Pound to downside bias.

If sales hold up on the month, though, this could see the GBP/NZD exchange rate recovering some of its lost ground in the near term.
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