GBP/NZD Forecast: Slipping to 1.92 if RBNZ Surprises

• GBP/NZD range of 1.9392 to 1.9547 possible short-term
• With risk of slide toward 1.92 or below if RBNZ surprises
• Cash rate seen rising 0.50% but larger increase possible

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The Pound to New Zealand Dollar rate saw a choppy start to the week but could be likely to find itself confined by a rough 1.9392 to 1.9547 range in the days ahead unless the Reserve Bank of New Zealand inspires the Kiwi to outperform in which case Sterling would potentially be at risk of revisiting 1.92. 

New Zealand’s Dollar came under pressure alongside Sterling and other currencies early in the week as the U.S. Dollar strengthened and risk aversion reigned across global markets including in stocks and commodities. 

Europe’s energy supply problem, the discovery of further coronavirus outbreaks in China and trajectory of central bank monetary policies in many economies have each helped to stir the pot in favour of the U.S. Dollar while weighing on risk sensitive currencies like the Kiwi and Sterling.

“It’s hard to stand in front of the USD train. Hard landing fears are building in the US, as they are here (the US 2yr-10yr curve became more inverted overnight), but the US has an inflation problem amid a still very tight labour market,” says David Croy, a strategist at ANZ. 

“That’s likely to see the Fed Funds rate on a par with NZ’s OCR by month-end. We expect the RBNZ to be hawkish tomorrow (they can’t afford not to be), but in a world of dollar dominance that may not do a lot for the beleaguered Kiwi, especially amid NZ recession fears,” he also cautioned Tuesday.

Above: Pound to New Zealand Dollar rate shown at daily intervals with Fibonacci retracements of April rebound indicating possible areas of short-term technical support for Sterling and resistance for the Kiwi. Click image for closer inspection. 

There is almost nobody who expects the Reserve Bank of New Zealand to follow in the footsteps of the Federal Reserve (Fed) by lifting its interest rate in a much larger than usual increment of 0.75% in Europe’s Tuesday evening or New Zealand’s Wednesday morning. 

Economists and markets widely expect the RBNZ to lift its cash rate by 0.50%, taking it from 2% to 2.5% on Tuesday, but with the Fed closing the gap with the RBNZ fast and the Kiwi coming under pressure in recent trade there may be a risk of a more hawkish surprise from New Zealand this week.

“The tone of the statement is likely to be the source of any market surprise,” says Imre Speizer, head of NZ strategy at Westpac.

“Our hawkish scenario comprises a 50bp hike, and a statement which emphasises its concerns about high inflation and that inflation expectations could remain elevated. The 2yr swap rate could rise 15bp in response,” Speizer and colleagues also said on Tuesday.

Above: Pound to New Zealand Dollar rate shown at daily intervals with Fibonacci retracements of 2022 downtrend indicating possible areas of short-term technical resistance for Sterling and support for the Kiwi. Includes 200-day moving-average.  Click image for closer inspection. 

For its part the RBNZ did say the following in its last policy decision back in June, which may be every bit as relevant this time out in July. 

“Monetary conditions need to act as a constraint on demand until there is a better match with New Zealand’s productive capacity. A larger and earlier increase in the OCR reduces the risk of inflation becoming persistent, while also providing more policy flexibility ahead in light of the highly uncertain global economic environment,” the June statement said in part.  

The Pound to New Zealand Dollar rate would be at risk of revisiting the round number of 1.92 during the midweek session if the RBNZ does catch the market unawares with a larger than expected rate step but would otherwise be likely to trade within a rough 1.9392 to 1.9547 range

That’s according to the author’s own model, which uses currencies’ sensitivities to the U.S. Dollar and a process of cross-currency triangulation to estimate where non-Dollar rates would be likely to trade as the greenback rises and falls. 

Above: NZD/USD shown at daily intervals with Fibonacci extensions of mid-June decline indicating prospective pivot points for the Kiwi. 

“NZD/USD will continue to trend lower because of the deteriorating global economy in our view. The RBNZ’s policy meeting on Tuesday has the potential to inject some volatility into NZD. The RBNZ has a reputation for surprising market participants,” says Joseph Capurso, head of international economics at Commonwealth Bank of Australia. 

“Our ASB colleagues and the consensus of New Zealand economists expect a third consecutive 50bps increase in the cash rate to 2.50%. We expect further rate hikes in the cash rate because of the risk inflation becomes entrenched. AUD/NZD can trend higher because it is undervalued,” Capurso and colleagues said on Monday this week. 

Much about where the Pound to New Zealand Dollar rate trades in the days ahead is likely to be influenced by price action in the main Kiwi exchange rate, NZD/USD, which has recently been tracking the spiralling decline of other major currencies like the Euro and Sterling.

This is because GBP/NZD tends to closely reflect the relative performance of Sterling and the Kiwi when each is measured against the U.S. Dollar and would likely struggle to sustain any moves above the 1.95 handle for as long as NZD/USD can hold above the nearby 0.6050 level.

Above: NZD/USD shown at weekly intervals with Fibonacci extensions of February 2021 to mid-June 2021 decline indicating prospective pivot points.