Pound-to-New Zealand Dollar Rate in the Week Ahead: New Short-term Downtrend Forecast to Extend

NZ Dollar

Image © Rafael Ben-Ari, Adobe Images

- GBP/NZD in new downtrend after peaking at 1.94

- Assuming a break below key support bear-trend to continue

- BOE meeting key for Sterling; U.S.-China trade talks for NZD

The Pound-to-New Zealand Dollar rate is trading at 1.8965 at the start of the new week after falling almost 1.7% in the week before.

From a technical perspective the immediate outlook is probably marginally bearish after the big sell-off last week flipped the short-term trend, however, it's also worth noting that the pair has alighted on a thick cluster of tough support from the 50-day MA and the trendline drawn from the December lows, and these will be difficult to pierce.

GBP to NZD daily

A clear break below the MA and the trendline would confirm an extension lower to a target at 1.8530. A break below 1.8730 would probably be enough to confirm a break and continuation down. The target is based on a 61.8% extrapolation of the length of the move immediately prior to the break (X), the standard technical method for judging breakouts. The timeline is 1-2 weeks.

The bearish RSI momentum indicator supports the forecast for lower prices as it is now lower than the level it was at at the January lows when the exchange rate was only at around 1.86. This may suggest ‘pent-up’ downside potential which could be expressed in the week ahead.

GBP to NZD 4 hour

Those in any doubt that the short-term trend is bearish should look at the 4hr chart which is showing the pair has fallen in a new sequence of peaks and troughs since the roll-over at the January 24 highs. This new sequence of lower lows (LL) and lower highs (LH) is the first sign of a new downtrend, and it biases the short-term outlook to more downside.

GBP to NZD weekly

The longer-term chart shows how the pair has declined after peaking at the October highs. It then based at 1.81 in December and since then has risen in what looks like a corrective three-wave 'abc' pattern higher.

The 'abc' now looks complete given waves a and c are of about the same length and it has that familiar zig-zag look. Now there is a risk that the more dominant overarching downtrend will resume its extension lower from here. This supports the short-term term bearish profile already discussed.

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The New Zealand Dollar: What to Watch

The New Zealand Dollar gained ground last week after one of the big three rating agencies Standard and Poor’s upgraded the outlook for the New Zealand economy.

Analysts will be looking for confirmation of this improved outlook when labour market data is released at 21.45 GMT on Wednesday. Analysts estimates suggest employment will increase by 0.3% in the fourth quarter and the unemployment rate will rise to 4.1% from 3.9% previously. If data shows a lower net change or higher rate, the NZD may take a hit from the disappointment.

The outlook for trade talks between China and the U.S. is another factor which is likely to impact on the Kiwi, which is sensitive to the outlook for growth in the Chinese economy owing to it being its largest trade neighbour.

The chances of the US and China reaching a successful trade deal have increased and this should support the outlook for the New Zealand economy and the Kiwi.

“We are getting more confident that we are closer to a deal and that the probability of a deal in March has increased,” says Allan von Mehren, chief analysts at Danske Bank. “The intense efforts put into the talks at the highest level – including from Trump and Xi – suggest that both sides are very keen to get the work done.”

Von Mehren’s rationale for believing a deal is close to being agreed is that China needs “more breathing space in tackling its debt challenges” and “Trump can present himself as the great deal maker to the American population going into the 2020 election campaign with a package that will benefit key voters in swing states.”

China targeted its own tariffs carefully to hit Trump’s heartland and the tactic appears to have worked because apparently at a recent meeting in the oval office, “Trump emphasised several times the large amount of soybeans that China will now buy and how it would benefit the farmers,” says Von Mehren.

The Pound: What to Watch this Week

Brexit will be the primary focus for Sterling markets in the week ahead with focus likely to be trained on whether Prime Minister May can squeeze any compromises out of the EU in regards to the Irish backstop.

Writing in the Sunday Telegraph this weekend, May said she would return to Brussels with a "fresh mandate, new ideas and a renewed determination".

MPs have voted to seek an "alternative arrangement" to guarantee the Northern Ireland border stays open after Brexit.

Once again, this weekend saw the Irish deputy prime minister say "there are no credible alternative arrangements" to the proposal.

There is a seemingly intractable deadlock in place between the UK and EU on the matter, and we wonder if this week will give us any new information on the matter.

Unless no new information that sheds clarity on the deadlock is offered we would expect the Pound to consolidate.

The main calendar event in the week ahead for the Pound is the meeting of the Bank of England (BOE) on Thursday at 12.00 GMT.

This meeting is more important than most because it will also include the BOE’s official quarterly economic forecasts, and a press conference with the BOE chairman Mark Carney afterward.

Whilst no interest rate changes are expected, the forecasts will speak volumes about the Bank’s assessment of the state of the economy, and could impact the Pound. Carney’s comments will also be closely parsed for a steer on future stance.

Data has been mixed recently and if the BOE’s assessment is negative it could weigh on Sterling - likewise a more resilient outlook would strengthen the Pound as it would make a case for multiple interest rate hikes in the event of Brexit uncertainty being removed.

Given a backdrop of heightened global growth fears and increased Brexit uncertainty the consensus seems to be tilted towards expecting a more sombre and cautious message from the Bank which would weigh marginally on Sterling.

“Policymakers had already taken a more cautious stance at the last meeting in December as the Brexit uncertainty dragged on and given the heightened anxiety about the global growth outlook since then, the Bank could go one step further and signal fewer rate hikes than currently being projected for the next three years,” says Raffi Boyadjian, currency analysts at FX broker

The other main data release for the Pound is Construction and Services PMI for January.

The week starts with the release of Construction PMI on Monday at 9.30 GMT, with estimates for a decline to 52.4 from 52.8 previously.

Services is out on Tuesday at 9.30 and is expected to drop to 51.0 from 51.1 in the previous month.

A greater than expected decline in PMIs may well be an early warning sign of a decline in the broader economy since PMIs are seen as leading indicators, and this could weigh on the Pound. Likewise, a surprise rise, suggesting underlying resilience, could strengthen Sterling.

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