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Pound-to-New Zealand Dollar in the Week Ahead: Upside Favoured on Daily Chart; Weekly Mixed

New Zealand Dollar week ahead forecast

Image © Natanael Ginting, Adobe Stock

- GBP/NZD range bound with bullish bias

- Chart pattern suggests weakness on weekly chart

- Politics back in focus for Sterling

- Kiwi to be impacted by global factors

The Pound-to-New Zealand Dollar rate is trading at 1.9453 at the start of the new trading week, over half a percent higher than the pair was seen at the start of the previous week.

The technical outlook is marginally bullish in the short-term but more mixed in the medium-term.

On the daily chart, we see repeated attempts to push above the range highs and sometimes this is a sign the exchange rate will eventually succeed.

GBP to NZD daily chart

For this reason, we are bullish on this timeframe and see a break above 1.9650 as confirming a continuation higher to a target at 1.97, 1.98, 1.99 and eventually 2.0000.

The two major moving averages (MAs), the 50 and 200-day are also underpinning the range lows, providing support to the pair, and suggesting the path of least resistance may be higher.

GBp to NZD weekly

The weekly chart is more ambiguous.

Although the pair has been rising up in an ascending channel since the December lows, and this is bullish assuming it continues, there are bearish signs too.

The fact the 200-week MA has successfully capped gains and is preventing more upside is actually quite bearish. Large MAs can sometimes mark major turning points in the trend.

This could be the point at which the uptrend reverses and starts going lower on a medium-term basis.

The strong patterned nature of the price action supports this view. It shows the possible makings of an ABCD or Gartley pattern.

These are basically large 3-wave zig-zags in which the first and third wave are of similar length.

It seems as if we are currently in the middle of the intermediate B-C wave. If it is a Gartley then C-D will take the price substantially lower to a target at around 1.7500.

Given the short-term chart is bullish, however, this bearish view remains speculative and we would ideally wish to see a break below the 1.9000 level first before taking it more seriously.

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The New Zealand Dollar: What to Watch

There are no major releases on the horizon for the New Zealand Dollar but the major fundamental themes may still be affected by global risk sentiment in the week ahead.

The Kiwi tends to be supported by any improvement in the global backdrop; an example of which we saw last week after the release of positive Chinese data for Q1 which suggests New Zealand's largest export destination might be turning a corner.

This bodes well for the outlook for New Zealand foreign exchange earners, such as milk.

The increasing likelihood of a trade deal being agreed between the U.S. and China also bodes well for the global economy.

This positive ‘global’ factor has been undermined by a weak domestic picture, however, after last week’s inflation data came out much lower-than-expected.

Inflation is normally seen as a bad thing, however, in the current situation where growth is weak inflationary signs would be a positive sign of increased demand.

Inflation was only 0.1% in the first quarter of 2019 - below the 0.3% forecast - and at an annualised rate of only 1.5%, down from 1.9% previously, (annualised means the quarterly change extrapolated over the year).

The easing in headline inflation increases the pressure on the Reserve Bank of New Zealand to cut rates from their current level at 1.75% at their next meeting in May.

"With weak growth likely to keep a lid on inflation for some time, we think the Bank will cut its policy rate twice in total before the year is out," says John Higgins, an economist with Capital Economics in London.

The New Zealand Dollar has for many years derived support from its higher interest rates relative to other nations. This advantage tends to draw in foreign capital as investors seek out higher yields, which in turns boosts the currency.

However, cutting the interest rate would rapidly reduce this key element of support.

 

The Pound: What to Watch this Week

Politics is back on the agenda for Sterling as UK parliamentarians return to their desks.

A top member of Prime Minister Theresa May's Conservative Party will tell her in the coming week that she must step down by the end of June or her lawmakers will try again to depose her, the Sunday Times reported, without citing sources.

The pressure on May comes amidst a precipitous drop in support for the Conservative party after a lengthy Brexit delay was announced, with voters apparently flocking to the newly-formed Brexit Party of Nigel Farage. We see the implications of the sudden shift in domestic politics as posing downside risks to Sterling with a 'Brexit at all costs' likely to come on October 31.

The Conservatives, under May or a new leader, know further delays will only deeply damage the party's standing with the public.

A change in leader of the Conservatives could mean the UK could be under the leadership of a 'Brexiteer' Prime Minister by late summer, we believe this creates the kind of uncertainty that would weigh on Sterling over coming weeks and months.

According to the report, the Conservative Party could go as far as changing party rules on leadership change.

May survived a vote of no confidence in December with current party rules stating parliamentarians cannot challenge her again until a year has passed. Graham Brady - who oversees party rules - will tell May the rules will be changed unless she quits, the Sunday Times reports.

There is also the chance of a vote being held on whether the UK should remain in a customs union, which could cause a surge higher for Sterling if affirmative.

It is a thin week for UK data with the most important releases being the UK public borrowing data and figures from the Consortium of British Industry (CBI), which is often a useful leading indicator for the broader economy.

UK public borrowing basically measures how much the government needs to borrow to meet its outgoings in the month in question. The data on Tuesday is forecast to show a relatively small £50m (£0.05bn) sum was required to cover the shortfall.

The chart below shows how over time the government has reduced the amount it has needed to borrow to cover its outgoings. This is obviously a positive sign for the economy, both because it reduces the country’s reliance on outside lenders which can leave its currency more vulnerable, and also because it suggests the economy is generating more tax revenue, which is a sign of increased activity.

Borrowing data

Public sector borrowing is not likely to move Sterling unless it surprises grossly higher or lower. Nevertheless, it provides useful background information. It is released at 9.30 BST.

The other key releases for the Pound are the CBI distributive trades and CBI industrial trends orders reports.

The former is a gauge of the “wellbeing of the retail sector” based on a survey of 150 retailers; the latter is a survey of manufacturers.

Both are considered important leading indicators and can impact on the Pound if the actual result differs substantially from the expected.

There is no official forecast for the retail survey which came out at -18 in March, but there is an official forecast for the manufacturing one, which is forecast to rise marginally to a balance of 2 from 1 in the previous month of March. The balance reflects the difference between positive and negative responses.

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