Pound to New Zealand Dollar Recovery Intact, Despite Recent Pullback
- Written by: Gary Howes
-
Image © Adobe Images
Uncertainty over global free trade and more cuts at the RBNZ will prove an ongoing headwind to the New Zealand Dollar.
The Pound to New Zealand Dollar (GBPNZD) exchange rate has retreated from Monday's highs, but gains look set to extend to 2024 highs in the coming weeks.
Global trade is undergoing an adjustment under U.S. President Donald Trump, threatening global growth and weighing on small, open economies like that of New Zealand.
"Dollar bloc currencies including CAD, AUD and NZD, and the EUR are in the firing line, following the decline in short-term bond yields vs the U.S. as investors pare back growth expectations," says Kit Juckes, an analyst at Société Générale.
GBPNZD reached a high of 2.2223 on Monday when it looked as though Trump would push ahead with a 25% tariff on Canadian and Mexican imports. After concessions by the two nations, Trump agreed to suspend the tariffs for a month, triggering relief for risk-sensitive currencies such as NZD.
The pullback in GBPNZD extends to 2.2046 in midweek trade, with further weakness denied by signs that trade tensions between China and the U.S. look set to rumble on.
The NZ Dollar and other China-linked currencies are exposed to an escalation in the trade war that officially commenced on Tuesday when the U.S. imposed a 10% tariff on Chinese imports, and China responded with its own tariffs and additional sanctions.
Yet, the NZD managed to extend gains against GBP, as analysts suggested China's response was limited and hints at a desire to avoid escalation.
This is offering some breathing space, but risks remain.
Headlines on Wednesday include news that China is considering a competition investigation into Apple, one of America's most valuable companies.
Trump is particularly defensive over perceived signs of mistreatment of U.S. corporations by other countries, and such moves will invite further scrutiny from Trump.
GBP/NZD investment bank consensus forecast for 2025. See the median, mean, highest and lowest targets, giving a highly accurate forecasting resource. Request your copy now.
China has said it wants to negotiate with Trump, but he has said he is in no rush to do so.
So, although there are hints that the two sides are fronting up ahead of a negotiation, the risks are still there, and this will ultimately weigh on NZD.
RBNZ to Cut Further as Unemployment Rises
Also weighing on the currency will be further rate cuts at the Reserve Bank of New Zealand (RBNZ), with the next falling on February 19.
The central bank has outcut most of its G10 peers and must continue to do so, if Wednesday's labour market release is anything to go by.
It was reported that in the fourth quarter of 2024, New Zealand's unemployment rate rose to 5.1% from 4.8%.
Employment and total hours worked continue to decline.
"We think the Reserve Bank will need to deliver more than they have signalled this year. When we last heard from them in November the RBNZ signalled that we’d see the OCR get to 3.5% this year and no lower until deep in 2027. That leaves conditions too restrictive, and we argue we need to get to 3%," says Mary Jo Vergara, Senior Economist at Kiwi Bank.
If this is delivered, NZD would naturally adjust lower.
Bank of England: GBP Weakness Likely Short-lived
Immediate attention for GBPNZD turns to the Bank of England decision on Thursday, where GBP is at risk of a 'dovish' rate cut.
Governor Andrew Bailey is expected to commit to the need for further rate cuts, potentially aiming to deliver four over the course of 2025.
This would reflect downgrades to the Bank's growth forecasts and upgrades to unemployment predictions.
With the market prompted to raise expectations for further cuts, Pound Sterling would mechanically adjust lower against the Kiwi Dollar.
However, the sharp selloff in GBP in the first two weeks of January must be considered, as it suggests the currency has already adjusted to a lower-growth future.
This limits the downside scope for GBP on Thursday.
Add to this the Bank's requirement to upgrade inflation forecasts, which will ultimately limit the 'dovish' tendencies of the Bank's Monetary Policy Committee.
One analyst we follow even suggests the MPC will have to abandon its cutting cycle later in 2025 as rising inflation forces the Bank into a pause, shoring up the GBP outlook and suggesting scope for GBPNZD weakness will be limited.