GBP/NZD Rate May Have Reached End of Recovery Road

• GBP/NZD stalled & potentially at risk of a deeper setback
• After strong NZ spending data drives NZD/USD recovery
• But U.S. CPI, Fed & USD key for GBP/NZD & NZD/USD 

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The Pound to New Zealand Dollar exchange rate has remained buoyant near to early October highs thus far in the new week but may already have reached the end of recovery road previously and could now be likely to consolidate recent gains given a pickup in market appetite for the Kiwi. 

New Zealand's Dollar was by far the best performing currency in the G20 basket on Tuesday and despite a lacklustre market for risky assets such as stocks and growth-sensitive commodities like industrial metals and energy. 

This saw the main Kiwi exchange rate NZD/USD rallying sharply from what were its lowest levels since the darkest days of the March 2020 coronavirus crisis fallout for financial markets and in price action that helped to push GBP/NZD lower despite an otherwise robust performance from the Pound. 

"For Q3, retail card spending was up 4.0% QoQ and 16.7% YoY. These data points do not suggest an economy that cannot handle ongoing RBNZ rate hikes. With that, NZD is the best performing G10 currency," says Stephen Gallo, European head of FX strategy at BMO Capital Markets. 

"We don't think the MPC will view the Aug./Sept. labor market data and feel relaxed about the near-term outlook for inflation, or second-round effects from elevated wage pressures," Gallo also said in reference to UK employment figures released earlier on Tuesday.

Above: Pound to New Zealand Dollar rate shown at hourly intervals alongside NZD/USD. 

Tuesday's price action came as the Bank of England (BoE) carried out further intervention in the UK government market where it has been providing emergency liquidity due to risks posed to some pension funds as a result of the violent rout that followed September's budget. 

The BoE's announcement came just as the Office for National Statistics said the UK unemployment rate fell from 3.6% to 3.5% during the quarter to the end of August and that annual wage growth reached 6% when one-off bonuses are included the measurement. 

However, more timely figures released alongside the report also offered a glimpse of the first cracks in the UK's labour market when revealing that new unemployment-related welfare claims rose at their fastest pace since the March 2021 'lockdown' period this September.

"The latest official data won’t dissuade the MPC from raising Bank Rate sharply next month; we expect a 75bp increase. But labour market conditions likely will deteriorate quickly quickly, enabling the Committee to stand pat after the February meeting, with Bank Rate at about 4%," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. 

All of this potentially stands the UK in contrast to New Zealand where spending, employment and pay growth have remained robust even in the face of a Reserve Bank of New Zealand (RBNZ) that has been unapologetic aggressive increases in the cash rate, which is expected to top 4% in the months ahead. 

Above: Pound to New Zealand Dollar rate shown at daily intervals with Fibonacci retracements of 2022 downtrend indicating possible areas of technical resistance for Sterling. Click image for closer inspection. 

Despite the robust Kiwi economy and the RBNZ's unrelenting focus on inflation, respite has been rare for the Kiwi in recent months with the currency under almost continuous pressure from a rampantly strong U.S. Dollar through much of the year so far.

"In our view, the RBNZ said “all the right things” last week, and are clearly determined to get on top of rampant inflation, but markets continue to fret about recession risks, and at the same time, US interest rates continue to rise, undermining higher Kiwi rates," says David Croy, a strategist at ANZ.

"GBP didn’t react to BoE stepping up support for bonds. This cross seems low given NZ/UK macro relativities," Croy said in a Tuesday reference to NZD/GBP. 

The U.S. Dollar did soften on Tuesday, enabling the Kiwi and Sterling to rally in a turn of price action that would potentially lead more of the early October GBP/NZD recovery to unwind if it persists for longer, given that GBP/NZD has typically had a negative correlation with NZD/USD. 

Any further correction could take longer to materialise, however, if the U.S. Dollar stages a comeback and this leaves a lot to be determined by the market's reading of what this Thursday's U.S. inflation figures are likely to mean for Federal Reserve (Fed) interest rate policy.

Above: NZD/USD shown at weekly intervals alongside GBP/USD and other U.S. Dollar facing exchange rates including an upside down USD/CNH and USD/CAD. Click image for closer inspection.