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The Pound to New Zealand Dollar exchange rate (GBP/NZD) continues to point higher.
The New Zealand Dollar has benefited over recent hours from supportive tariff headlines and a Reserve Bank of New Zealand (RBNZ) policy update; however, these developments are unlikely to shift its broader direction against Pound Sterling.
GBP/NZD continues to trend higher, with recent declines being predicted in an article we published last week (the arrow annotations in the below daily chart were drawn last Monday!):
The chart shows the outline of a trend higher, but we thought that a dip was needed in the near term, and this is playing out.
Fundamental developments have aided the Kiwi Dollar strength, which has encouraged the GBP/NZD dip:
1) The U.S. Court of International Trade ruled that former President Donald Trump exceeded his authority by imposing sweeping tariffs under the International Emergency Economic Powers Act (IEEPA).
The court found that the economic concerns cited did not meet the "unusual and extraordinary threat" threshold required by IEEPA, and thus, the tariffs were deemed unlawful.
This decision invalidated the so-called "Liberation Day" tariffs, which included a 10% baseline duty on most imports and higher rates on goods from countries like China and the European Union.
Stocks responded by advancing, as did the New Zealand Dollar which has a high sensitivity to broader market sentiment.
2) The RBNZ's latest policy update and guidance pointed to the prospect of a pause in the cutting cycle in the coming months, which will push New Zealand's bond yields in a more supportive direction.
The Bank's speedy pace of cuts has been a major headwind, and this has whittled away the NZD's interest rate advantage. Any pause can prevent further erosion of any yield advantage.
"The Kiwi firmed after yesterday’s MPS as markets took the view that while the RBNZ’s new OCR track fell to the same point markets were banking on (2.85%), it fell more gradually, raising the prospect of pauses at upcoming meetings. That helped the Kiwi hold its own," says David Croy, an analyst at ANZ.
"The swaps market is pricing in 33% odds of a July cut that becomes fully priced in for October. Despite some growing signs of weakness in the economy, that cut is seen as the last one in this cycle," says Elias Haddad, an analyst at Brown Brothers Harriman.
But NZD Strength to Stay Limited
Although these developments have been supportive of the Kiwi, there will be limits to how much juice they can offer any rally.
On the trade front, uncertainty could actually increase in the wake of the ruling, and NZD dislikes uncertainty:
"One thing we know for sure, Trump won’t go down without a fight, and the appeal could end up in the Supreme Court. Far more intelligent scribes than I have suggested that the administration could shift the legal authorisation to other ways to impose tariffs, but there is heightened uncertainty once again," says a currency trader at JP Morgan.
Persistent uncertainty will hardly be supportive of the NZD, which has struggled under Trump 2.0.
On the domestic front, question marks are already being asked about whether the RBNZ will be able to pause following soft economic data that showed business confidence remains in short supply.
ANZ's business confidence survey showed headline confidence fell 12 points to +37 in May, and expected own activity fell 13 points to +35.
The past own activity component of the survey - which ANZ is the best GDP indicator of the survey - fell from 11 to 5, while past employment fell back into negative territory at -10.
Pricing and cost indicators eased, suggesting the RBNZ can afford to err on the side of further interest rate cuts.
One-year-ahead inflation expectations lifted marginally from 2.65% to 2.71%; "we’d call that pretty steady," said ANZ.
The NZD will likely stay under pressure until data emerges showing the Kiwi economy has made a decisive turn for the better.