Pound / New Zealand Dollar Rate Could Hit 2.0699 On BoE Rate Decision

• GBP/NZD nears a major resistance level on charts
• Could overcome 2.0565 to reach 2.0699 Thursday
• If BoE lifts Bank Rate and prepares for QE unwind
• Soft NZD/USD also helping to underpin GBP/NZD

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The Pound to New Zealand Dollar rate could reach highs of 2.0699 on Thursday if some strategists are right about the possible market response to an impending Bank of England (BoE) policy decision.

The New Zealand Dollar rose against some currencies during the opening half of the week but its attempted recovery wasn’t enough to dislodge Sterling from its upward trend and already appeared to be fading by Thursday, leaving the GBP/NZD rate pointed higher.

Pound Sterling remained buoyant against the New Zealand Dollar on Thursday after reaching its highest level since May 2020 during the prior session and could be likely to overcome a major nearby resistance level on the charts if the Bank of England (BoE) lifts its interest rate at 12:00.

“Sterling is rallying hard into tonight’s BoE meeting; so they need to deliver on hawkish rhetoric! 0.48 [GBP/NZD: 2.0708] still the key technical level,” says David Croy, a strategist at ANZ, referring to NZD/GBP in a Thursday market commentary.

Croy and the ANZ team have noted a major resistance level at 2.0708 which, if overcome by the Pound to New Zealand Dollar rate, would likely be perceived in the market as an indication of a significant shift higher in the long-term trend.

Above: NZD/USD shown at 4-hour intervals alongside GBP/NZD.

• GBP/NZD reference rates at publication:
  Spot: 2.0465
• High street bank rates (indicative band): 1.9750-1.9892
• Payment specialist rates (indicative band): 2.0280-2.0363
• Find out about specialist rates, here
• Set up an exchange rate alert, here

Pound Sterling would however need to overcome another major level located immediately overhead at 2.0565 before it could get near to 2.0708 although that could happen this Thursday if the BoE’s policy decision provides the market with fresh inspiration to bid for Sterling

The BoE is widely expected to announce a 25 basis point increase in Bank Rate to 0.50% on Thursday after inflation surged to 5.4% in December, although this hasn’t quite been fully priced-into interest rate markets and there are also other reasons for why Sterling could benefit from the decision.

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“The rate hike is more or less fully priced and therefore will unlikely move GBP much. Still, there is room for GBP/USD to lift closer to 1.3715 if the BoE’s minutes canvass a discussion of shrinking its balance sheet,” says Carol Kong, a senior currency strategist at Commonwealth Bank of Australia.

The BoE announced in August last year that once Bank Rate reaches 0.50% it will begin to slowly but surely shrink its £895BN balance sheet that has swelled since the 2008 financial crisis due to multiple rounds of quantitative easing that have hoovered up UK government bonds from the market.

Above: GBP/NZD shown at weekly intervals with major moving-averages of long-term trend and Fibonacci retracements of 2020 decline indicating likely areas of technical resistance to a further recovery by Sterling.

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Any shrinking of the balance sheet would take place through a process known as quantitative tightening and could be favourable for Sterling if it leads UK government bond yields to rise sufficiently to reduce the gap between them and their U.S. equivalents.

GBP/NZD would likely rise to 2.0699 on Thursday if CBA’s Kong and colleagues are right in anticipating that the main Sterling exchange rate GBP/USD could be lifted to 1.3715 following the BoE’s decision.

However, GBP/NZD’s gains would be tempered if the main Kiwi pair NZD/USD was to lift above the prevailing level of 0.6626, although this is far from guaranteed given that the week’s earlier rebound in NZD/USD looked to be reversing on Thursday.

“NZ interest rate markets were disappointed by the wage inflation report yesterday (employment report was solid), causing a bull steepening on the day. From here, the chances of a 50bp hike on the 23rd appear even more remote now, so markets will continue to whittle away at pricing for that meeting,” says Damien McColough, head of interest rate strategy at Westpac.

Above: Market expectations for RBNZ cash rate at each meeting through May 2023. As of February 02.

One prospective reason for the midweek softening of NZD/USD is New Zealand’s latest wage growth figures that were released alongside the final quarter’s employment report on Tuesday and showed pay growth continuing at an unchanged pace from the prior quarter.

Statistics New Zealand’s Labour Cost Index rose by 0.7% last quarter and was a disappointment for an economist consensus that had anticipated a 0.9% increase, while the annual pace of pay growth came in at 2.6 percent for the year to the end of December 2021.

While New Zealand’s strengthening labour market pushed the unemployment rate to a historic low of 3.2% last quarter, the absence of any further escalation of wage pressures has left investors and traders with few grounds to expect an interest rate response beyond that which is already anticipated of the Reserve Bank of New Zealand (RBNZ) for its February 23 monetary policy decision.

Pricing in the overnight-indexed-swap market indicated on Wednesday that investors and traders were anticipating a cash rate of 1.05% for February 23, which is higher than the rate that would prevail if the RBNZ raised its benchmark by a typical 0.25%.

That also indicates some perceived probability of a larger increase than that, which may have been effectively ruled out by this week’s wage figures.

This potentially explains why the Kiwi reverted to its back foot against the U.S. Dollar in the midweek session, which was a supportive development for the Pound to New Zealand Dollar rate, although Sterling will be sensitive on Thursday to the outcome of the BoE’s impending policy decision.