GBP to NZD Exchange Rate Slumps as UK Inflation Fails to Climb and Bank of England Bets Fall

June 13, 2018 – Written by David Woodsmith

This week’s UK data has indicated that British price pressures may be more subdued than investors expected, which has led to a drop in Bank of England (BoE) interest rate hike bets and a weaker British Pound to New Zealand Dollar (GBP/NZD) exchange rate. The main cause of GBP/NZD movement on Wednesday was UK inflation data.

After slipping from 1.9117 to 1.9050 last week, the GBP/NZD exchange rate could be in for another week of losses. While GBP/NZD fluctuated earlier in the week, the pair hit a low of 1.8932 on Wednesday and continued to trend within the region of 1.89 at the time of writing.

GBP Sold as UK Inflation Disappoints, Bank of England Rate Hike Bets Slip

Signs of weakening UK price pressures weighed heavily on the Pound on Wednesday, causing more analysts to doubt that the Bank of England (BoE) would be prepared to tighten UK monetary policy at all this year.

Britain’s May Consumer Price Index (CPI) report met expectations in most prints, with the monthly and core figures remaining steady as analysts forecast.

However, the year-on-year inflation figure was forecast to have improved from 2.4% to 2.5%, but instead remained at 2.4%.

As the report, followed an unexpected slip in UK wage growth earlier in the week, Pound investors are becoming increasingly concerned that UK price pressures were subdued – rather than remaining resilient.

According to Amit Kara from UK think-tank NIESR, inflation could be on track to see further weakness later in the year too:

‘Inflation is now well below the recent peak of 3% in December and is likely to continue falling over the course of the year as the effects of the Brexit-induced currency deprecation fades. This will be offset to some extent by rising wages and higher unit labour costs. Lower inflation and higher nominal wages will help lift household real income growth this year.’

Due to concerns that UK price pressures could continue to weaken, there are concerns that they may be too weak to sustain any interest rate hikes from the Bank of England this year.

As a result, bets of an August rate hike from the BoE softened. According to Tom Stevenson from Fidelity International:

‘Today’s stalled inflation rate suggests the Bank of England may have missed the opportunity to raise interest rates this year.

With inflation heading back to target, and the link between buoyant employment and price rises now apparently broken, the Old Lady looks increasingly powerless to act,’

NZD Gains Despite Contraction in NZ Food Inflation

The New Zealand Dollar was able to climb against a weaker Pound, despite a lack of strong support in New Zealand Dollar trade this week.

Wednesday’s Asian session saw the publication of New Zealand’s May food inflation report, which worsened from 2.3% to -0.1%.

While not a hugely influential figure, it is the only New Zealand data of note so far this week meaning the ‘Kiwi’ is relatively lacking in domestic support.

Global factors have not supported the New Zealand Dollar much either, as recent US trade protectionism haws kept investors anxious about the possibility of a global trade war.

As a result, the New Zealand Dollar’s latest gains have been more due to broad Pound weakness.

GBP/NZD Forecast: Federal Reserve and Domestic Data in Focus

Wednesday evening will see the Federal Reserve hold its June policy decision.

As the risky New Zealand Dollar often becomes less appealing when the global Central Bank outlook rises, the Pound to New Zealand Dollar (GBP/NZD) exchange rate could recover if the Fed takes a hawkish stance.

If the Fed’s stance is largely unsurprising though, the Pound may struggle to recover its losses without some stronger domestic support.

Thursday will see the publication of Britain’s May retail sales results. As consumer activity makes up a considerable amount of economic activity in Britain, an impressive retail sales report could make the Pound more appealing.

This could boost UK growth expectations and even make investors entertain the possibility of a BoE interest rate hike in August again.

New Zealand’s May business PMI will be published on Friday, but Britain’s retail sales results and Federal Reserve developments are more likely to be influential to the Pound to New Zealand Dollar (GBP/NZD) exchange rate.

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TAGS: Pound New Zealand Dollar Forecasts