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New Zealand Dollar Consolidation May Help Lift GBP/NZD Above 1.94

- NZD in consolidation mode after strong rally, aiding GBP/NZD. 
- But GBP outperforming & eyeing top spot in major FX for 2021.
- GBP/NZD may see 1.94 near-term but gains to be short-lived. 
- NZD/USD seen in comeback before long, new highs possible. 

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  • GBP/NZD spot rate at time of publication: 1.9198
  • Bank transfer rate (indicative guide): 1.8478-1.8612
  • FX specialist providers (indicative guide): 1.8901-1.9054
  • More information on FX specialist rates here

The New Zealand Dollar has corrected lower in the New Year and was in consolidation mode on Wednesday, aiding a nascent turn higher in the Pound-to-New Zealand Dollar exchange rate in the process, although both moves could have further to run over the coming weeks. 

New Zealand's Dollar was one of the major currency universe's top performers in the fading light of 2020 and so accordingly the Kiwi unit has cooled its heels early in the New Year, enabling the Pound-to-New Zealand Dollar rate to catch a breather from previously relentless declines. 

The correction seen over the last week is part of what analysts expect will be a broader consolidation and has coincided with a tepid rebound in the U.S. Dollar against many major currencies includng the Euro and commodity-sensitive units like the Kiwi and Australian Dollar. 

"Needless to say, a period of consolidation after the 10% run in the most recent extension has been due," says Ray Attrill, head of FX strategy at NAB. "Technicals put 0.70 as a key support level, but it wouldn’t surprise to see a temporary move below that level – on any adverse risk-off episode or short-lived reprieve for the embattled USD...Our end-2021 target remains at 0.76, consistent with a 0.74-0.78 trading range in the final quarter of the year, notwithstanding the near-term headwinds."

Above: Pound-to-New Zealand Dollar rate shown at daily intervals with NZD/USD (blue).

NZD/USD is seen trading mostly in the 0.70-to-0.72 range over the first quarter, which has upside implications for the Pound-to-New Zealand Dollar rate in a market where GBP/USD is outperforming other major exchange rates. 

Pound Sterling has been an outperformer and was within arm's reach of the top spot for 2021 on Wednesday after being boosted last week when the Bank of England (BoE) stepped back from the brink of a negative rate policy and as an almost best-in-class vaccination campaign ramps up. 

The UK had vaccinated 4.2 million people by Tuesday, meaning that more than 7 million and in excess of 10% of the country's population had either been innoculated or already tested positive for the coronavirus.

Above: GBP rates & performances Vs majors on select timeframes. Source: Netdania Markets. Click for closer inspection.

Furthermore, government plans to have 15 million vaccinated by mid-February and all over-18s offered an innoculation before the end of June had been largely unaffected by disruption at a Belgium-based manufacturing facitlity oeprated by Pfizer and BioNtech. The Pound's fundamental headwinds are dissipating if tailwinds aren't beginning to emerge and meanwhile, the main Sterling exchange rate GBP/USD is said to be undervalued and on route to 1.40.

This implies further gains ahead for GBP/NZD in a market where NZD/USD is sidelined between 0.70 and 0.72. 

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GBP/NZD would trade between 1.9444 and 2.0 if  GBP/USD was testing 1.40 and NZD/USD ranging between 0.70 and 0.72, although much depends on investor appetite for the U.S. Dollar. 

"Intriguingly, FX price action in recent weeks loosely fits vaccine rollout trends; the USD and GBP have been outperforming, fitting their faster vaccine rollout profile, while EUR has lagged," says Richard Franulovich, head of FX strategy at Westpac. "GBP outperformance is a function of diminished hard Brexit risks. But, if recent divergence in vaccine rollout profiles continues to grow there may be a tradeable story for rates and FX. On current trends the US and the UK are set to return to some form of normalcy much faster than Europe." 

Source: Westpac.

The U.S. Dollar sell-off of 2020 is widely expected to continue this year but there's problem in that other currencies' existing gains over the greenback have already lifted some countries' trade-weighted exchange rates to near what are problematic levels for central banks. Trade-weighted concerns are their most acute in Europe, where the European Central Bank (ECB) is expected to say this Thursday that it's watching EUR/USD closely. 

This potentially makes GBP/USD outperformance a necessary ingredient of the U.S. Dollar downturn because in a market where EUR/USD is still rising, GBP/USD must rise at the same pace in order for GBP/EUR to hold steady and in the process minimise upward pressure on the Eurozone's trade-weighted exchange rate. GBP/USD would have to rise even faster than EUR/USD if the GBP/EUR rate is to rise and in the process neutralise the uplift that a rising EUR/USD bequeaths to the trade-weighted Euro. 

GBP/EUR always closely reflects relative price action in GBP/USD and EUR/USDin just the same as GBP/NZD always reflects relative moves in GBP/USD and NZD/USD. 

"For the FX markets, expectations of US reflation are USD negative as they reduce safe haven demand for the currency. However, seesawing between expectations of reflation and current soft economic data will probably continue for a while longer, limiting NZD upside in the near term," says David Croy, a strategist at ANZ, who flags 1.9230 as a likely resistance level for GBP/NZD and 0.7240 as the level to watch on the upside for NZD/USD. 

Above: NZD/USD shown at daily intervals alongside GBP/USD (blue).

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