Pound-New Zealand Dollar Week Ahead Forecast: UK Data Poses Upside Risk  

• GBP/NZD on back foot near multi-month low 
• Potential upside risk stemming from UK data 
• But RBNZ CPI survey could limit a rebound

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The Pound to New Zealand Dollar exchange rate entered the new week on the back foot but would potentially have scope to approach one-month highs up ahead if official figures show UK wages closing the gap between pay growth and a falling annual inflation rate.

New Zealand's Dollar outperformed major currency counterparts during Monday's trade following an upbeat BusinessNZ PMI survey suggesting the Kiwi manufacturing sector picked up last month with activity rising back to levels typically consistent with industry expansion. 

But the new year increase in activity was counterbalanced by deteriorating sentiment about the outlook for the sector as well as national and global economies.

"The results of the RBNZs survey of inflation expectations is the local highlight. The Q4 22 reading showed two year inflation expectations were at a 30 year high," says Joseph Capurso, head of international economics at Commonwealth Bank of Australia.

"Our colleagues at ASB expect an easing in two year ahead inflation expectations in Q1 23. An unchanged or stronger reading would put the RBNZ on high alert and can bump NZD/USD higher," Capurso and colleagues write in a Monday research briefing. 

Above: Pound to New Zealand Dollar rate at daily intervals with selected moving averages. Click image for closer inspection. 

Tuesday's release of the latest Reserve Bank of New Zealand (RBNZ) inflation expectations survey is the highlight is likely to be influential of the Kiwi and GBP/NZD but will be followed in quick succession by the publication of UK employment figures for December. 

The British Pound was higher in the wake of data that revealed UK wages continue to grow at inflationary levels amidst ongoing 'tightness' in the UK labour market.

UK regular wages grew at their fastest pace outside of the Covid pandemic period at 6.7% in the year to December said the ONS, outstripping growth of 6.5% seen the year before and economist expectations for 6.5% growth.

The Pound displayed a clear reaction and rose 0.20% against the NZ Dollar in the hour that followed the release.

"UK labour market data released this morning confirmed that there was no material loosening in labour market conditions as we ended last year," says Ellie Henderson, an economist at Investec.

"In such an environment of high vacancies and a relatively small pool of available labour, it is unsurprising that wage growth remained elevated," she adds.

The data keeps alive the prospect of further rate hikes at the Bank of England, which could underpin UK bond yields, and therefore, the Pound.

Above: Financial model-derived estimates of probable trading ranges for selected currency pairs this week. Source Pound Sterling Live. (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.)

The overall UK inflation rate is seen falling from 10.5% to 10.3% while the more important core inflation rate is expected to have fallen from 6.3% to 6.2%, although the latter number has frequently surprised on the upside of expectations in recent months. 

The Pound to New Zealand Dollar rate would potentially rally back toward January highs just above 1.93 if this week's UK data pressures the Bank of England (BoE) to continue lifting Bank Rate at its next meeting in March. 

But any attempted rebound would likely be limited if Tuesday's RBNZ survey leads markets to bet with greater confidence on another half percentage point increase in the Kiwi cash rate being announced next week, and likewise if this week's U.S. data weighs further upon the U.S. Dollar. 

"Next week, we expect the RBNZ to hike by 50bp, but markets are undecided, suggesting a reaction in either direction is possible," says Imre Speizer, head of NZ strategy at Westpac. 

"Multi-month, we remain bullish, expecting a break above 0.6540 to signal a move towards 0.6800. The main driver of that is expected to be a weaker USD as the US economy underperforms relative to major economies," Speizer adds in Monday market commentary. 

Above: NZD/USD shown at daily intervals with selected moving averages. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.