New Zealand Dollar Buoyant, Pound Slides to 6-Month Lows After UK Inflation data

December 21, 2023 - Written by David Woodsmith

STORY LINK New Zealand Dollar Buoyant, Pound Slides to 6-Month Lows After UK Inflation data

The Pound to New Zealand Dollar exchange rate (GBP/NZD) was undermined by the latest UK inflation data on Wednesday.

Although the New Zealand dollar retreated from intra-day highs, it remained in positive territory and posted 5-month highs against the US dollar.

The GBP/NZD exchange rate posted sharp losses on the day and retreated to 6-month lows just above 2.0100 and a minor correction to around 2.0130 faded quickly with the pair around 2.0110.

Following the data, markets priced in additional Bank of England rate cuts for 2024 which hurt the Pound.

Overall risk conditions will also be important for both currencies with the New Zealand dollar gaining net support from optimism that global interest rates will decline in 2024.

There was also further evidence of yen selling against the kiwi following the Bank of Japan policy decision.

The headline UK annual inflation rate retreated further to 3.9% for November from 4.6% previously. This was significantly below consensus forecasts of 4.4% and the lowest reading since September 2021.

Petrol prices fell significantly on the month with overall fuel prices declining 10.6% over the year.

The core inflation rate also declined sharply to 5.1% from 5.7% and below expectations of 5.5%. This was the lowest reading since February 2022.

The services-sector inflation rate declined to 6.3% from 6.6%.

According to MUFG; “The data is now starting to come in much weaker than the BoE assumed in its latest inflation forecasts published on 2nd November. The BoE estimated inflation at 4.8% in October and 4.6% in November so this is by far the biggest undershoot relative to BoE forecasts since the global inflation shock began to unfold in 2021.”

The bank still expects that the BoE will push back against market expectations in the short term, but the narrative will be increasingly difficult to sustain.

It added; “All that said, the scale of the downside surprise in today’s CPI will likely prove telling, possibly not immediately, but as we proceed through Q1 next year.”

SocGen expects the Pound will struggle; “It’s not a thrilling prospect (a bearish consensus view of the UK means it would be more fun looking for positives in the outlook for Sterling).”

In the New Zealand mini budget announced on Wednesday, the government announced NZ$7.5bn in spending cuts in an attempt to balance the budget over the medium term.

ANZ noted that a weak economy will complicate budget policy "With some immediate downside risk around the economic outlook, the Government will have some very tough decisions to make come Budget time in May."

A tighter fiscal policy will tend to ease pressure on monetary policy. Interest rates have been held at 5.50% since May 2023.

According to the latest comments from RBNZ Governor Orr, inflation has not been beaten; “There's still a long way to go, particularly with the level of core inflation, or homegrown inflation, still remaining too high."

Orr, however, also noted that the latest GDP data was weaker than expected and described the situation as complicated.

He added that; “We are busily internalising," and added that there were important data points including employment ahead of the February monetary policy decision.

According to BNZ chief economist; "Our own view is that we'll see cuts to the cash rate around the third quarter of next year."

ASB added; "We think the recent GDP release was significant: it showed momentum in the economy is grinding to a halt more rapidly than anticipated. We have brought forward our forecast for the first rate cut to August 2024, six months earlier than our previous view."

MUFG is still cautious over the New Zealand dollar; “High household debt levels in New Zealand still pose the risk of bigger domestic slowdowns in the year ahead. The RNBZ has more room to cut rates after raising rates further into restrictive territory at 5.50%.”

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TAGS: Pound New Zealand Dollar Forecasts