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The Pound to New Zealand Dollar exchange rate (GBPNZD) has recovered the psychologically significant 2.0 level ahead of the weekend but peaking Bank of England rate hike expectations and a slowing economic data pulse could mean fresh 2023 highs are out of reach in the near term.

GBPNZD has witnessed some notable volatility in May with no less than three days seeing -0.80% moves.

The rally on Friday stands at 1.0% at the time of writing, offering some relief for those looking to sell Sterling and buy New Zealand Dollars.

Above: GBP/NZD at daily intervals.

The Pound's advance comes as investors bet the Bank of England will raise interest rates yet further, with a peak near 5.0% expected by the market following Thursday's Monetary Policy Report that was widely considered as 'hawkish'.

Money market pricing shows investors see a further 34 basis points of hikes from the Bank in 2023, this contrasts with an effective 0 from the RBNZ.

This suggests the peak in the UK's base rate could rest at 4.75%-5.0% and New Zealand's at 5.25%.

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The closing differential (in November the Bank of England's peak rate was expected much lower at 4.40%, whereas RBNZ's was at 5.0%) has helped GBPNZD trend higher over recent weeks.

The exchange rate's 2023 gain now stands at 5.0% but the uptrend has taken a knock owing to May's 1.30% decline.

The retracement could suggest the uptrend is now due a period of consolidation, particularly with rate hike expectations in the UK potentially peaking: in short, it is hard to see the Bank of England deliver anything above 5.0%.

If the market's rate hike expectations retreat from here - for example to 4.75% - then Sterling could ease more broadly.

The UK data impulse has been positive for much of 2023 with a string of economic surprises guiding the Pound higher. But, Friday's GDP reading for March disappointed at -0.3%, signalling that positive surprises might also start to fade.

Pound-New Zealand Dollar could therefore struggle to break through 2023's highs at 2.04000 over the coming weeks with next week's labour market release a key risk.