Pound-to-New Zealand Dollar Week Ahead Forecast: RBNZ Could Help Break Resistance Zone

- GBP/NZD has risen in May
- But now faces strong resistance
- RBNZ to provide NZD volatility

Above: RBNZ Governor Orr is in focus midweek. File image © Pound Sterling Live, Still Courtesy of RBNZ.

• GBP/NZD reference rates at publication:
• Spot: 1.9683
• Bank transfers (indicative guide): 1.8998-1.9136
• Money transfer specialist rates (indicative): 1.9074-1.7540
• More information on securing specialist rates, here
• Set up an exchange rate alert, here

The Pound is likely to struggle against the New Zealand Dollar over the short-term given the significant technical resistance in the market around current levels, however the mid-week Reserve Bank of New Zealand meeting is tipped by some market professionals to offer excitement.

The meeting of the Reserve Bank of New Zealand (RBNZ) will come as the Pound-to-New Zealand Dollar exchange rate (GBP/NZD) looks to extend its May advance, having travelled from an open of 1.9307 to record rates around 1.9688 at the present time.

However the start of a new week sees the GBP/NZD exchange rate entertaining interesting levels from a technical perspective.

As the chart below shows, some tentative resistance lines can be found around here suggesting it will take a decent pulse of buying to crack GBP/NZD into new multi-month highs:

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The top line represents the upper limit of recent multi-week action, while the second line represents the highest closing level since September 2020.

With market psychology being somewhat self-fulfilling when major resistance is encountered, the implication of these levels is that the Pound will struggle to push much higher.

Therefore, the week ahead could well see a retracement in GBP/NZD and only a notable impulse of strength could break the resistance bands.

But one potential source of any such impulse might be found in the mid-week meeting of the RBNZ where guidance on the outlook for the New Zealand economy and interest rates will be delivered.

"We think NZD volatility could climb this week," says Ashish Agrawal, an analyst and foreign exchange strategist at Barclays.

Barclays say they are expecting the NZ Dollar to outperform the Australian Dollar after weakening sharply last week.

But they expect the RBNZ to keep its policy unchanged and is hence unlikely to change the recent gradual downtrend in the New Zealand Dollar against other currencies.

If the expectation is correct the Pound could give a more considered push against the aforementioned resistance levels in GBP/NZD.

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While the RBNZ's latest MPS economic forecasts are widely expected to upgrade their outlook, Barclays look for policy makers to emphasise that any policy normalisation is still far off in its "least regrets" framework.

Inflation is expected to rise well above 2.0% this year - as is the case in most countries - but the RBNZ has already foreseen this and will regard it as temporary.

Economists at Westpac say they expect interest rate hikes will begin only in early 2024, although unconventional monetary policy measures will unwind before then.

Economists at Goldman Sachs say RBNZ officials will head into the monetary policy meeting under a backdrop of better-than-expected recent economic performance and an improved near-term fiscal position.

"The bank’s updated path for the unemployment rate is likely to be in focus," says Goldman Sachs analyst Zach Pandl, who expects forecasts will be revised lower, but still show a near-term "bump" in the path.

If realised, the analyst sees the RBNZ as likely to retain a dovish tone and maintain current guidance, which could weigh on the New Zealand Dollar.

However Pandl acknowledges risks that an updated path showing sustained declines in the unemployment rate could see the RBNZ simultaneously pull forward its expectations for a rate rise, thereby delivering a hawkish signal to the market.

Such a surprise could put downside pressure on GBP/NZD.

At present, markets are fully discounting a hike by September 2022, with an additional three hikes priced through end-2023, significantly ahead of Goldman Sachs projections for a rate rise in the first quarter of 2024.

"While it’s possible markets press this further if the bank surprises on the hawkish side next week, we see risks skewed towards markets fading the extent of normalisation priced by then," says Pandl. "That being said, among the antipodean currencies we currently prefer NZD over AUD."