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The Pound to New Zealand dollar exchange rate has receded from post-pandemic highs but the author’s model suggests it should remain supported above 2.14, and that it could have scope to rise back above 1.16 up ahead.

GBP/NZD rallied briefly back above the 2.16 handle on Monday as worries about the health of the global economy drove another meltdown in global markets that has upended popular carry trades in recent weeks.

However, it has receded from the post-pandemic highs around 2.19 seen briefly last week, encouraged by the first interest rate cut from the Bank of England in more than four years, and could remain well contained below Monday’s highs unless New Zealand’s Q2 labour market figures surprise on the soft side on Tuesday.

“Our ASB colleagues expect the unemployment rate rose to 4.7% from 4.3% and for employment to have fallen by 0.2%/qtr. This is a more rapid deterioration than the RBNZ expects,” Commonwealth Bank of Australia economists wrote in a week ahead briefing.

Above: Pound to New Zealand dollar rate shown at daily intervals with selected moving averages and Fibonacci retracements of June rally indicating possible areas of technical support.

“Indeed, our ASB colleagues expect two 25bp rate cuts, in October and November, and they caution the RBNZ could start cutting as soon as this month’s meeting,” the Commonwealth Bank of Australia team also said.

While unraveling global markets have been a prominent weight around the ankles of the New Zealand dollar in recent weeks, so too has the Reserve Bank of New Zealand after its said in July that interest rates could be reduced “over time consistent with the expected decline in inflation pressures.”

The July statement prompted derivative markets to bring forward the timing of the first expected interest rate cut to October but also saw investors and traders assigning a small probability to the prospect of an interest rate cut as soon as August, and Tuesday’s data will be key to how expectations for policy easing evolve.

Consensus looks for employment to fall 0.3% in Q2, lifting the unemployment rate to 4.7%, from 4.3%. This could see the market become more confident in the prospect of a near-term rate cut from the RBNZ, which would likely weigh on the Kiwi dollar and could help lift GBP/NZD back above the 2.16 handle this week.

Above: Market implied expectations for RBNZ cash rate over time, as at August 05. Source: Goldman Sachs Marquee.

“The rise in unemployment has picked up pace in recent quarters and Stats NZ’s monthly employment indicator (MEI) shows an outright decline in jobs over the past three months. The 2Q labour market statistics this Wednesday are the last piece of data ahead of a potential August cut,” Barclays strategists said on Sunday.

“A print in line with consensus, which sees the unemployment rate rising from 4.3% in 1Q to 4.7%, would likely weigh on NZD especially considering an August cut is not fully priced yet,” they also said.

The Pound to New Zealand dollar rate should remain supported above 2.14 even if the Kiwi labour market is stronger than expected, however, as global growth concerns and the meltdown in global markets are likely to continue weighing on high beta currencies and high carry favorites in many parts.

Global markets were already under pressure owing to heightened tensions between Israel and Iran but saw further losses last week owing to a spate of poorer than expected US economic figures, which has led investors and traders to bet confidently that the Federal Reserve will cut rates as many as four times this year.