GBP & NZD Outperform

May 22, 2024

GBP & NZD Outperform

  • GBP rallies on a lower-than-expected drop in UK inflation.
  • RBNZ unexpectedly delivered a hawkish hold, supercharging NZD.
  • The FOMC May meeting minutes is expected to highlight the higher-for-longer policy rate environment.

USD remains supported as Fed policymakers continue to urge patience before easing. Yesterday, Fed Governor Christopher Waller said “in the absence of a significant weakening in the labor market, I need to see several more months of good inflation data before I would be comfortable supporting an easing in the stance of monetary policy”. Waller’s comments were echoed overnight by Cleveland Fed President Loretta Mester (voter) and Atlanta Fed President Raphael Bostic (voter).

The FOMC May meeting minutes is expected to highlight the higher-for-longer policy rate environment (7:00pm London). At that meeting, the Fed kept rates steady while acknowledging the worsening inflation outlook by adding that “In recent months, there has been a lack of further progress toward the Committee's 2% inflation objective.” In his post-meeting press conference, Fed Chair Jay Powell pushed back against rate hike expectations and highlighted paths that would cause the Fed to want to consider rate cuts. As such, the minutes will be key to seeing whether there was any underlying dissent with Powell’s more cautious tone.

NZD outperformed and New Zealand bonds underperformed after the RBNZ delivered a hawkish hold. We anticipated a dovish hold and we’re caught flat-footed. The RBNZ left the Official Cash Rate (OCR) at 5.50% as widely expected. However, “the Committee discussed the possibility of increasing the OCR at this meeting” and “agreed that interest rates may have to remain at a restrictive level for longer than anticipated in the February Monetary Policy Statement”.

Indeed, the updated projections have the OCR peaking at 5.65% in Q4 2024 vs. 5.60% in Q3 2024 previously, and a first OCR cut is pencilled-in for Q3 2025 vs. H1 2025 previously. The higher outlook for the OCR reflects the more gradual decline in inflation towards 2%. Of note, the RBNZ revised up its estimate of the nominal long-run neutral interest rate to 2.75% from 2.50% suggesting policy may be less restrictive than previously assumed.

The RBNZ post-meeting press conference generated some volatility. RBNZ Governor Adrian Orr said raising the OCR today had been a “real consideration”. However, Chief Economist Paul Conway downplayed the risk of a rate hike by December warning that interpreting the OCR track forecasts is “spurious”.

Regardless, NZD/USD pared back most of its post RBNZ meeting gains as the swaps market continues to position for RBNZ rate cuts this year. 34bps of OCR cuts is currently priced-in for 2024 vs. 44bps yesterday. A rate cut by year-end is about right in our view.

GBP/USD rallied to near a two-month high around 1.2760 on a lower-than-expected drop in UK inflation. UK headline inflation plunged to 2.3% y/y in April (consensus: 2.1%, BOE projection: 2.1%)) from 3.2% y/y in March reflecting energy-related base effects and a fall in the Ofgem energy price cap. Core inflation slowed to 3.9% y/y (lowest since October 2021) vs. 4.2% y/y in March. Services inflation eased only a tick to 5.9% y/y (consensus: 5.4%, BOE projection: 5.5%).

Overall, UK services inflation remains high and suggests the BOE can wait before cutting the policy rate. Moreover, the BOE will look through regulated energy price base effects and wait for clearer signs of persistent disinflation before easing. The swaps market slashed odds of a June and August rate cut. A first full rate cut is priced-in for September/November. The upward adjustment to UK interest rate expectations supports a firmer GBP particularly versus EUR.

EUR/USD is directionless around 1.0860. ECB President Christine Lagarde pointed out again “there is a strong likelihood” of a rate cut in June. But ECB Governing Council member Joachim Nagel tempered expectations of additional policy rate cuts beyond June warning “we should not cut rates hastily and jeopardize what we have achieved.”

Brown Brothers Harriman & Co. (“BBH”) may be used to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2024. All rights reserved.

As of June 15, 2022 Internet Explorer 11 is not supported by

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see

captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction