Week Ahead: UK and NZ central banks in focus

With the Federal Reserve decision and US monthly jobs report out of the way this past week, currency markets are looking next to two other key central banks that will be reporting their latest policy decisions in the week ahead – the Bank of England and the Reserve Bank of New Zealand.

With the Federal Reserve decision and US monthly jobs report out of the way this past week, currency markets are looking next to two other key central banks that will be reporting their latest policy decisions in the week ahead – the Bank of England and the Reserve Bank of New Zealand.

Both the British pound and New Zealand dollar have weakened markedly against the US dollar within the past three weeks, but much of the GBP/USD and NZD/USD tumbles have been due to a US dollar that has rallied sharply on expectations of rising inflation and interest rates in the US. Wednesday’s FOMC decision highlighted an outlook for inflation that is climbing very close to the Fed’s 2% target and could potentially overshoot in the foreseeable future. Friday’s US jobs report showed lower-than-expected numbers for both job creation and wage growth, but the US dollar remained supported on market perceptions that the disappointing data should not significantly deter the Fed on its policy tightening path.

Amid the current US dollar strength, both GBP/USD and NZD/USD have dropped sharply below multiple key support levels. The RBNZ issues its policy decision and statement along with a press conference on Thursday in Wellington. No interest rate changes are expected at that time. The RBNZ’s last statement in March indicated that the central bank was not expecting to raise rates anytime soon from its current record low of 1.75%, due to slowing economic growth and weak inflation. At that time, Acting Governor Grant Spencer stated that “monetary policy will remain accommodative for a considerable period.” If this dovishness continues to prevail on Thursday, the very likely prospect of Fed interest rates overtaking RBNZ rates as soon as June could serve to pressure NZD/USD over a medium-term horizon.

As for GBP/USD, the fall since mid-April has been dramatic. The Bank of England issues its own policy decision along with its inflation report on Thursday. Like the RBNZ, no major changes to interest rates or monetary policy by the BoE are expected. Governor Mark Carney recently took the opportunity in an interview to lower expectations for an imminent rate hike due to weak data out of the UK. As a result, the pound was hit severely, as previously high expectations for another impending rate increase were dashed. Coupled with the sharp rise in the dollar, the drop in the pound prompted GBP/USD to take a steep dive in subsequent days and weeks. Barring any hawkish surprises on Thursday, if the BoE remains as dovish as Carney recently implied, GBP/USD could remain under pressure in the event that the US dollar remains supported.

Aside from the pound and New Zealand dollar, the US dollar also has the potential to be impacted significantly next week due to scheduled releases. Both the CPI (Thursday) and PPI (Wednesday) inflation readings will affect the outlook from mixed inflation signals that the market has been receiving from recent economic data. Other key data in the week ahead will include: Australian retail sales and New Zealand inflation expectations on Tuesday, the Australian annual budget release on Wednesday, UK manufacturing production on Thursday, and the Canadian jobs report on Friday.

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