As the weekend passed, the exchange rate between the Pound and the New Zealand Dollar GBP/NZD recovered and surpassed the psychologically significant $2.00 level. However, the likelihood of achieving new highs in the near term could be hampered by the prospect of a rate hike from the Bank of England and a slowdown in economic data momentum.
The month of May has been marked by notable volatility in the GBPNZD exchange rate, with three days witnessing downward movements of -0.80% and an upward shift of 1.23% in favour of the Pound on Friday.
Investors are speculating that the Bank of England will raise interest rates even further, following the Monetary Policy Report released on Thursday, which was deemed "hawkish." The market anticipates a peak of around 5.0%.
Money market pricing indicates that investors expect an additional 34 basis points of rate hikes from the Bank in 2023, while the Reserve Bank of New Zealand's effective rate hike is zero. This suggests that the maximum base rate in the UK could be between 4.75% and 5.0%, while that of New Zealand could be 5.25%.
Although the GBP/NZD exchange rate has gained 5.0% in 2023, the uptrend has been dampened by the 1.30% decline in May. This retracement may indicate that the uptrend is due for a consolidation phase, especially as the expectation of a rate hike from the Bank of England may have peaked. In other words, it is unlikely that the Bank of England will exceed 5.0%.
To conclude, the GBP/NZD exchange rate has shown signs of recovery, but the prospect of a rate hike from the Bank of England and a slowdown in economic data momentum could limit its potential for reaching new highs. The current situation suggests that a period of consolidation may be in order, as the market adjusts its expectations for interest rate hikes in the UK and New Zealand.
From a technical point of view, ever since 2016 and Brexit happened, we have seen this pair test the $2.00 on many occasions, however, it's been unable to hold above it for a prolonged period.