GBP/NZD Risk Tilting Higher into BoE Decision

 "The Q4 data still show a labour market beyond ‘maximum sustainable employment’, but some signs of softening are beginning to show" - ANZ.

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The Pound to New Zealand Dollar Rate has remained in a sideward drift around the 1.91 level so far this year but could get an opportunity to advance if Thursday's Bank of England (BoE) decision wrongfoots a market consensus that has turned more cautious about the outlook for Bank Rate this week. 

New Zealand's Dollar was a laggard among major currencies in Wednesday's trade after final quarter employment figures warned of a cooling labour market, although the Kiwi still managed to outperform Sterling in price action that has kept GBP/NZD under wraps around the 1.91 level. 

"The labour market figures were not as strong as our ASB colleagues had expected," says Carol Kong, an economist and currency strategist at Commonwealth Bank of Australia. 

"As a result, ASB now expect the RBNZ to raise the official cash rate (OCR) by ‘only’ 50bp at its 22 February meeting and an OCR peak of 5.25%.  Market pricing for the February meeting has pulled back," she adds. 

Meanwhile, Sterling has underperformed since money and credit figures showed mortgage approvals falling back near to post-financial-crisis levels in December as other forms of lending shrank and the money supply contracted.

Above: Pound to New Zealand Dollar rate shown at daily intervals with Fibonacci retracements of September rally indicating possible areas of technical support, and selected moving averages denoting possible technical resistances. Click image for closer inpsection. To optimise the timing of international payments you could consider setting a free FX rate alert here.

Tuesday's data has been interpreted by some analysts as a possible reason for the BoE to raise Bank Rate by less than half a percentage point, which would undershoot the consensus for a 0.5% increase to 4%, although it's not clear why in light of other data emerging from the UK over recent weeks. 

Other data recently highlighted rising inflation in the services sector and accelerating wage growth while GDP figures suggested the economy has not slowed as far or fast as anticipated by the BoE in its November forecasts.

"Core inflation and wage data argue for a 50bps hike on Thursday to 4.0% (we and about 3/4 of the consensus expect this), but we think the MPC will signal a slowdown to 25bps hike(s) going forward," says Mark McCormick, global head of FX strategy at TD Securities.

BoE policymakers have previously flagged rising services prices and building wage pressures as indicators of persistent inflation risk that would motivate a "forceful" response such as larger-than-usual increases in Bank Rate. 

Pound Sterling could benefit if such a response is forthcoming on Thursday and if the BoE also continues to warn of similar steps in the future, which might lead GBP/NZD to test its recent highs a short distance above the 1.92 level.

"We look for a 25bp hike on Thursday and 25bp in March for a 4.0% terminal. Risks skew heavily to a 50bp hike this week and 4.25% terminal given strong wage growth," says Robert Wood, a UK economist at BofA Global Research.

Above: Pound to New Zealand Dollar rate shown at weekly intervals. Click image for closer inspection. If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.

"Either way, we expect the BoE to finish hiking in March. In our view, falls in headline inflation, recession and an easing labour market should allow the BoE to pause," he writes in Wednesday commentary.

With the market at large still anticipating a 0.5% increase on Thursday, Sterling could make an easy target for sellers if the BoE neglects to follow up on its earlier warnings, although the prospect of a similar story in New Zealand could see GBP/NZD supported above its recent lows around 1.89.

This is after Wednesday's data suggested New Zealand's labour market cooled in the final quarter with employment growing more slowly than imagined by many economists while the unemployment rate ticked higher. 

"The Q4 data still show a labour market beyond ‘maximum sustainable employment’, but some signs of softening are beginning to show. And as we look to 2023, timely indicators point to a significant easing in labour market pressures," says Sharon Zollner, chief economist at ANZ. 

"Combine these timely indicators with Q4 CPI inflation coming in cooler than the RBNZ feared, and we see a strong argument for the RBNZ to hike ‘just’ 50bp in February, rather than the 75bp signalled by the November MPS OCR forecast," Zollner and colleagues write in a Wednesday research briefing.