GBP/NZD Exchange Rate Range Narrowing into Key Risk Events

"Consumption of major items including automobiles, electronic products and household items should be boosted, and spending on services such as sports, leisure and cultural and tourist services should be encouraged" CPC Central Committee.

Image credit: Lux Tonnerre. Sourced: Flickr. Licensing conditions: CC 2.0.

The Pound to New Zealand Dollar exchange rate has remained close to the middle of its July range in recent trade but while it could be likely to trade an even narrower 2.0634 to 2.0761 band in the days ahead, the balance of risks might be likely to shift from the upside to the downside of these levels as the week draws to a close. 

New Zealand's Dollar was little changed in relation to Sterling for the week to Wednesday but lower against the U.S. Dollar and higher in comparison with the Euro as the latter two sat at the top and bottom of G10 group of currencies for the period and ahead of a tripartite of central bank interest rate decisions. 

"The Kiwi continued its tepid recovery off Friday morning’s low, seemingly taking a lead from equities and commodities rather than EUR, with the USD DXY not doing a lot even as US bond yields continued their rise," says David Croy, a currency strategist at ANZ. 

"NZD price action has been very mixed this month, and it's likely to remain so given contrasting drivers and a lack of strong domestic drivers, with the RBNZ on hold and an election due in October," he adds in a Wednesday market commentary.

Croy and colleagues said Wednesday that NZD/GBP is likely to "follow AUD/GBP" in the wake of Australia's second quarter inflation report and ahead of next week's Bank of England (BoE) interest rate decision though Wednesday's Federal Reserve (Fed) interest rate decision is likely to garner much attention in the interim. 

Above: Pound to New Zealand Dollar rate shown at 2-hour intervals alongside NZD/USD.

Uncertainty and market risk is highest in relation to Wednesday's Fed decision but could have modest upside implications for GBP/NZD in either of the two most likely eventualities, which include a widely expected decision to increase the Fed Funds rate to 5.5% and a potential surprise decision to leave it unchanged.

The prospect of an unchanged Fed Funds rate could be underappreciated following the latest decline in U.S. inflation and the financial sector turbulence seen back in March when market pricing of the September interest rate decision peaked a short distance above 5.5% and led some small and medium-sized lenders to fail.

"Markets are pricing the Fed funds rate, currently 5.125% (mid), to be 26bp higher after today’s meeting and another 11bp higher by November," wrrites Sean Callow, a senior FX strategist at Westpac in Sydney, in a Wednesday market commentary. 

For GBP/NZD, an increase in the Fed Funds rate would likely have supportive implications on Wednesday and even more in the event of any 'hawkish' guidance about the outlook for borrowing costs, given the risk of further financial instability and GBP/NZD's typically positive correlation with the U.S. Dollar.

But despite this and although a surprise decision to leave rates unchanged would be almost sure to weigh on the U.S. Dollar, it's far from a foregone conclusion that this kwould do much to topple the GBP/NZD or Sterling more broadly, given the currently high level of the Bank of England (BoE) Bank Rate.

Above: Pound to New Zealand Dollar rate shown at daily intervals with Fibonacci retracements of May rally and selected moving averages indicating possible areas of technical support for Sterling.

But the Pound to New Zealand Dollar rate could struggle to avoid testing the bottom of the author's estimated 2.0634 to 2.0761 range - a model derived estimate - and might even risk falling below it later in the week if the Bank of Japan (BoJ) surprises financial markets with another adjustment to its Yield Curve Control program. 

"There is a 30% possibility of YCC policy modifications being discussed. An unexpected YCC policy tweak could lead to a reflexive JPY surge with USD/JPY possibly easing to 135. No change to YCC could trigger modest JPY weakness," says Chang Wei Liang, an FX strategist at DBS Group Research. 

New Zealand's Dollar has recently had a positive correlation with the Japanese Yen so could be likely to benefit to the detriment of GBP/NZD from any policy change at the BoJ on Friday, though there are also other downside risks for Sterling stemming from within and around the Asia Pacific region.

This is after the Chinese government announced its intention to support the recovery of the world's second-largest economy with further stimulus on Monday with plans to bolster domestic consumption in a range of areas including in outbound tourism, suggesting some prospect of a tailwind for the Kiwi economy in the months ahead.

"The meeting demanded efforts to actively expand domestic demand and give play to the fundamental role of consumption in driving economic growth. Consumption of major items including automobiles, electronic products and household items should be boosted, and spending on services such as sports, leisure and cultural and tourist services should be encouraged," a readout of the meeting of the Political Bureau of the Communist Party of China (CPC) Central Committee said on Monday.

Above: NZD/USD shown at daily intervals with Fibonacci retracements of 2023 fall indicating possible areas of technical resistance for the Kiwi.