GBP to NZD Exchange Rate Sheds Advance Attempts as Bank of England Caution Weighs

August 2, 2018 – Written by Frank Davies

Despite the New Zealand Dollar’s broad weakness on market risk-aversion and an interest rate hike from the Bank of England (BoE), the British Pound to New Zealand Dollar (GBP/NZD) exchange rate may not have advanced much by the end of the week. Cautious tones from Bank of England officials continue to weigh heavily on the Pound.

Since opening this week at the level of 1.9305, GBP/NZD has seen highly mixed movement. At the beginning of the week GBP/NZD touched a weekly low of 1.9224, but on Thursday the pair briefly touched on a weekly high of 1.9404. At the time of writing on Thursday afternoon, GBP/NZD trended in the region of 1.9322.

GBP Sold on Cautious Tone of Bank of England (BoE) Governor Mark Carney

The Pound saw a brief jump in demand on Thursday, as the Bank of England (BoE) not only hiked UK interest rates, but did so unanimously.

Some of the bank’s more dovish policymakers were expected to vote to leave UK interest rates frozen, but all nine members of the BoE Monetary Policy Committee (MPC) voted to hike UK interest rates in August’s decision.

This was seen by markets as surprisingly hawkish, and Sterling was briefly even stronger as the bank indicated that interest rates would continue to rise over the coming years.

However, in a speech following the Bank of England’s interest rate hike, BoE Governor Mark Carney took a more cautious tone than expected about the bank’s path of UK interest rate hikes in the coming years.

Carney indicated that the bank would ‘walk, not run’, on UK interest rate hikes, causing investors to believe that Carney was signalling market expectations may have been too high. This led to a Sterling slump and GBP/NZD spent most of the afternoon tumbling.

According to Balraj Sroya, Sales Trader from Foenix Partners:

‘Today the Bank of England defied Brexit uncertainty and brought music to the ears of Sterling bulls as the MPC voted unanimously to increase interest rates to 0.75%.

Unfortunately, Sterling’s rally higher was halted by the “unreliable boyfriend” stating that the monetary policy needs to “walk, not run, to stand still” as the interest rates’ natural level rises gradually.’

As a result of the market disappointment in the day’s cautious Bank of England tone, the Pound failed to benefit from July’s UK construction PMI from Markit. The construction report unexpectedly jumped from 53.1 to 55.8.

The construction PMI was also far less influential than the disappointing UK consumer confidence and manufacturing data published earlier in the week.

NZD Struggles to Capitalise on Pound Weakness Amid Risk-Aversion

Investors are still hesitant to buy risky trade-correlated currencies like the New Zealand Dollar, due to continued protectionist trade rhetoric from the US and fresh trade tensions between the US and China.

As China is New Zealand’s biggest trade partner, the latest falls in Chinese markets and US-China trade jitters continue to keep pressure on the New Zealand Dollar.

On top of trade jitters keeping the risky ‘Kiwi’ unappealing though, this week’s New Zealand data hasn’t been particularly supportive either.

Wednesday saw the publication of New Zealand’s Q2 job market results. While the unemployment rate worsened partially due to the rising participation rate, investors were still disappointed in the data and it failed to support to New Zealand Dollar.

GBP/NZD Forecast: UK Services PMI in Focus

As the Pound to New Zealand Dollar exchange rate continues to trend relatively closely to the week’s opening levels, Friday’s key UK PMI data could help drive the exchange rate higher or lower this week.

Friday will see the publication of Britain’s July services PMI from Markit. As services make up the most notable chunk of Britain’s economic activity, this data could give investors a better idea of how Britain’s economy performed last month.

The services PMI is forecast to have slowed from 55.1 to 54.7. If the data falls short of expectations, Brexit jitters may take focus for Pound investors again and GBP/NZD could end the week lower.

A stronger figure may help GBP/NZD to sustain some gains though.

Of course, any developments regarding US-China trade tensions could influence the New Zealand Dollar in the coming sessions, but failing that next week will be a big week for UK and NZ news too.

The Reserve Bank of New Zealand’s (RBNZ) August policy decision will be held during next Thursday’s Asian session, and the latest UK growth data will be published next Friday.

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TAGS: Pound New Zealand Dollar Forecasts