The Pound to New Zealand Dollar exchange rate (GBP/NZD) grew by 1.5 cents yesterday as markets speculated over the possibility that the Federal Reserve could announce a tapering of asset purchases at its widely awaited policy statement tomorrow evening.
Sterling struck a daily high of 1.9690 against the ‘Kiwi’ Dollar during the evening as the Financial Times weighed in on the Fed speculation debate by releasing an article suggesting that the US Central Bank will in fact reduce the pace of its asset purchasing scheme this week.
Last week the Wall Street Journal ran a report indicating that the opposite was true: that the Fed would sit tight on monetary policy this time out. However, the FT stated that:
“Ben Bernanke is likely to signal that the US Federal Reserve is close to tapering down its $85 billion a month in asset purchases when he holds a press conference on Wednesday.”
The FT also suggested that subsequent moves, in other words more cuts to QE3 or interest rate hikes, will only be introduced when the US economy improves considerably.
Essentially the article argues that like a flower that will drown if it is watered too much, the US economy needs to get used to life without cheap money, in order to prevent catastrophic bubbles forming. However, like the flower, which can’t survive without water, the US economy needs a certain amount stimulus to help rejuvenate the labour market and re-build investor confidence.
The New Zealand Dollar is considered a high-risk currency because of the relatively small size of New Zealand’s economy and its substantial reliance on external factors. Subsequently the ‘Kiwi’ stands to lose a significant amount of ground if the Fed slows its risk-boosting asset purchasing programme.
GBP/NZD hit a 9-month high of 2.0032 last week in response to the recent run of strong UK economic data, combined with fears over the future of the Chinese economy. Later on this week the New Zealand GDP report is expected to show that economic output slowed from 1.5% in Q4 2012 to just one-third of that amount, 0.5%, in Q1 2013. If this report prints inline with forecasts and the Federal Reserve does announce a tapering of QE3 then it is entirely likely that we could see the Pound to New Zealand Dollar exchange rate (GBP/NZD) surge through key psychological resistance and post another 9-month high above the 2.0032 mark.
Data yesterday showed that the US NAHB Housing Market index reached a 7-year high of 52 in May, which reflected well on the US economy and fuelled Fed taper speculation further.
Later on today the UK Consumer Price Index is forecast to rise from 2.4% to 2.6%, which should give the Pound a boost as the prospect of further quantitative easing is thrown under the shadow of overshooting inflation once more.
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