GBPNZD Looking bleek, whats in store?

Similar to the New Zealand dollar, the pound has also extended its rebound against the US dollar overnight, resulting in cable rising back up to the 1.2550-level, moving 1.2550-level, and moving further above the low from 13th May at 1.2156.

The Fundamentals GBP

Similar to the New Zealand dollar, the pound has also extended its rebound against the US dollar overnight resulting in cable rising back up to the 1.2550-level, and moving further above the low from 13th May at 1.2156. The pound is benefitting from the broad- based pullback from the US dollar, and from the hawkish comments from the BoE’s chief economist on Friday. Huw Pill emphasized that it was “crucial” to prevent the UK from drifting deeper into “inflationary psychology”.

He believes that “inflationary momentum in the UK is currently strong”. It reflects tight labor market conditions which are contributing to wages growing at stronger rates than would normally be demand consistent with the inflation target. He also noted that business confidence has remained resilient so far which he believes shows anticipation that they will be able to re-establish profit margins by passing on higher costs to customers.

The negative labor shocks from Brexit, the retreat of globalization, and lasting effects from COVID which he believes have caused almost 500k people to leave the UK labor force, and have been fuelling the upward momentum for inflation. As a result, he believes that “we still have some way to go” to tighten monetary policy in the UK and make the return of inflation to target secure.

The comments suggest he favors the BoE delivering further rate hikes throughout this year even as the UK economy slows more sharply in response to the cost of living crisis. The fundamental case for further BoE rate hikes at upcoming policy meetings was supported last week by i) the unexpected resilience of retail sales growth in April (+1.4%), ii) increasingly elevated rate of inflation in April (CPI at 9.0%Y/Y), and iii) stronger wage growth including bonuses in March (+7.0%).

The UK rate market is currently priced for 30bps of hikes by the June MPC meeting and 127bps of hikes by the end of this year. Market participants remain comfortable with the view that the BoE will deliver further 25bps hikes at all remaining five MPC meetings this year. The balance of risks is currently skewed more in favor of the BoE delivering a hawkish surprise by hiking by a larger 50bps at some point at upcoming policy meetings rather than a dovish surprise by leaving rates unchanged. We expect the BoE to pause rate hikes later this year as UK growth slows more sharply, but acknowledge that the latest developments pose upside risks to our UK rate view. Further BoE tightening would help to provide more support for the pound if it boosts the BoE’s inflation-fighting credibility amongst market participants by dampening inflation expectations.

NZD Currency Outlook

The New Zealand dollar is benefitting both from the broad-based pullback for the US dollar, and speculation over a hawkish policy update from the RBNZ ahead of their upcoming policy meeting on Wednesday. It has resulted in the NZD/USD rising back above the 0.6450-level overnight and moving further above the low from 12th May at 0.6217. Nevertheless, the pair is still well below levels that were recorded at the start of April at close to the 0.7000-level.

The vast majority (19/22) of economists surveyed by Bloomberg expect the RBNZ to deliver another 50bp rate hike this week lifting their key policy rate to 2.00%. The RBNZ is then expected to slow the pace of rate hikes at the four remaining meetings for this year by delivering 25bps hikes at each meeting. Market participants in the New Zealand rate market are not as convinced that the RBNZ will slow down the pace of hikes after delivering a final 50bps hike his week. The New Zealand rate market is pricing in around 54bps of hikes for this week, 88bps by July, and 127bp by August. Market participants expect at least one more 50bps hike over the summer. The performance of the New Zealand dollar in response to this week’s policy meeting will likely depend upon whether the RBNZ signals that further larger 50bps hikes are likely at upcoming policy meetings.

Without such a hawkish policy signal, the kiwi is vulnerable to disappointment. The fundamental case for further policy tightening in New Zealand remains compelling. The latest CPI and labor market reports both continued to reveal building inflation In particular, average hourly earnings have recorded their strongest rate of increase over the last two quarters to Q1 since Q3 2006. It keeps pressure on the RBNZ to keep tightening policy pressures.

NZD outweighs GBP

We still believe the GBP/NZD currency will fall further as the GBP negative against the NZD overall. Price has fallen from 1.9500 resistance and doesn’t show signs of turning. We expect to hit 1.87900 throughout the year.

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