Pound to New Zealand Dollar Week Ahead Forecast: RBNZ Going Big

Above: File image of RBNZ Governor Adrian Orr at a press conference. Image courtesy of RBNZ.

The Pound to New Zealand Dollar exchange rate could rally if the Reserve Bank of New Zealand (RBNZ) cuts interest rates by 75 basis points this week.

Such a move would amount to an emergency rate cut, signaling that the central bank is so concerned about the state of the economy that it must speed up the pace at which it delivers support.

There is a 20% expectation that the RBNZ will cut by 75bp, meaning the move has not been fully 'priced in' to the NZ Dollar. Such an outcome would result in a sharp move higher in GBP/NZD.

At the same time, if such a big cut does not materialise, there is some scope for a readjustment higher in the NZD.

A cut of this magnitude move would be unusual, and the market thinks a 50bp cut is more likely, hinting at the potential for NZD strength (GBP/NZD) weakness in the wake of the decision.

"The RBNZ will likely cut rates by another 50bp. At 4.75%, the OCR is well above the central bank’s estimate of neutral at around 3.00% and inflation and inflation expectations are running close to the centre of the RBNZ’s 1-3% target band. The economy is beginning to show signs of life after a double recession and the RBNZ's aggressive rate cuts," says David Forrester, an analyst at Crédit Agricole.

The risks of a higher GBP/NZD come amidst a relatively well-behaved technical backdrop, with the pair respecting the confines of the 50% and 38.2% Fibonacci retracement lines of the strong rally we saw in October.

This is 2.1423 at the bottom and 2.1522 at the top, which makes for a very tight range.

As the above chart shows, the pair has been trapped between these levels for the better part of the past week, suggesting the pair can hold around here until the RBNZ decision.

Markets are presently fully priced for a 50bp cut from the RBNZ, meaning some upside NZD reaction as a 75bp move is avoided.

But ultimately the FX reaction will depend on the guidance provided by the RBNZ regarding the outlook for policy in 2025 and beyond, the formal baseline OCR projection and how the Bank describes the balance of risks around that forecast.

"Our central expectation is that the RBNZ will project the OCR to decline to around 3.50% by the end of next year – around 35bps lower than projected in the August MPS," says Darren Gibbs, Senior Economist at Westpac.

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Significant downgrades to the economic outlook and OCR would represent the biggest NZD downside outcomes on the day.

"It is also possible that the RBNZ could lower its year-end target for the OCR. It might do this if recent price and wage outcomes – both slightly softer than expected – are viewed as providing a very high degree of confidence that inflation will stay close to the target midpoint. If so, the RBNZ would likely want to more quickly move policy towards a neutral setting," says Gibbs.

However, the New Zealand economy is also showing signs that it has passed its low point, which means there is scope for a dose of optimism from policymakers.

New Zealand has recently reported a strong lift in business confidence and Westpac thinks improved dairy commodity prices might cause the RBNZ to take a cautious approach to further lowering the OCR the closer it moves to the neutral zone.

This would represent a NZD-supportive development.