GBP/NZD Week Ahead Forecast: Setup Increasingly Constructive

Above: RBNZ Governor Adrian Orr. File Image © Pound Sterling, Still Courtesy of RBNZ

The Pound to New Zealand Dollar exchange rate can remain supported into the midweek policy decision at the Reserve Bank of New Zealand.

The central bank won't alter interest rates but it could be a significant event for the NZ Dollar as Adrian Orr and his team will address the potential for an interest rate cut later in the year.

The July decision comes days after a much-watched survey of Kiwi businesses revealed a further deterioration in conditions, prompting economists to say the central bank has little choice but to consider cutting interest rates.

The latest NZIER Quarterly Survey of Business Opinion showed high interest rates continued to weigh on confidence, and one local bank said the economy is enduring recessionary conditions again.

Following the survey, Auckland Savings Bank brought forward its forecast for when the RBNZ will cut interest rates.

"We have changed our OCR outlook – we expect the RBNZ to cut the OCR from November this year," says Nick Tuffley, Chief Economist at ASB. "Households are starting to buckle more noticeably under the various pressures of high interest rates and high (though easing) living cost inflation."

The NZD can come under further pressure against GBP if the RBNZ points toward a rate cut later in the year. To be sure, it will be coy and won't be generous in raising hopes of a cut.

But any nod to easier monetary conditions later in the year can trigger NZD weakness.

The result would be a further lift to the GBP/NZD exchange rate which is looking increasingly constructive. Pound Sterling has some wind in its sails, rising even as the odds of an August interest rate cut increase, suggesting that some sentiment adjustment is underway following last week's election.

"The pound could be about to stage a bigger recovery as it has momentum on its side now that the UK’s political risk premium has been eradicated," says Kathleen Brooks, an analyst at XTB. "Interestingly, the pound is rising, alongside expectations of a rate cut from the Bank of England next month, there is currently a 66% chance of a rate cut priced in by the OIS market."

The convincing win by Labour in last week's election sets the UK up for a period of political stability, with Labour saying it is already moving to establish closer ties with Europe. Analysts have written that closer EU ties can support the Pound in the coming months as the long-standing Brexit premium the Pound still carries fades.

“We have raised our GBP forecasts in part on better political stability ahead and in part on the signs of a stronger rebound in economic growth than we previously expected," says Derek Halpenny, head of FX research at MUFG Bank Ltd.

Track GBP/NZD with your own alerts, find out more here.

GBP/NZD has broken above its key moving averages and immediate support is at 2.0845, which is the 100-day moving average. While above here, gains to the 2.10 level can occur in the coming one to two weeks.

Bear in mind that the NZD can find some support and frustrate GBP/NZD upside on Thursday if U.S. inflation numbers undershoot expectations and boost investor sentiment.

This is because a soft reading will raise the odds of an interest rate cut at the Federal Reserve in September. However, an above-consensus reading would risk a setback to AUD, allowing GBP/NZD to test multi-week highs.

Headline CPI is expected to decline to 3.1% year-on-year, down from 3.3% in May, a level last seen in January. The core inflation print is expected to be at 0.2% month-on-month.

Such readings would signal the disinflation process is underway again, having been disrupted by the price acceleration in H1. This will raise the odds that the Federal Reserve will cut interest rates in September and potentially weigh on the Dollar.

The inflation report will follow Friday's labour market report, which confirmed a trend of cooling is underway, and this will continue to bring wage pressures down. Falling wages will ultimately result in easing domestic inflation.

"This week will be a hot one for US macro, with the CPI report for June out on Thursday," says Francesco Pesole, FX Strategist at ING Bank. "There is a clear weakening trend emerging in the US jobs market and that will, in our view, push an FOMC that wants to avoid unnecessary economic pain to cut three times this year, starting in September."