Pound-New Zealand Dollar Could Continue Lower This Week
- Written by: Gary Howes
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The pound-New Zealand dollar exchange rate drops 0.40% to 2.2930 on Monday, amidst a solid start to the new week for NZ exchange rates.
That's linked to a relatively upbeat mood in FX markets, which seems to defy the maze of calendar events that markets have to navigate this week, and that's even before we consider the muddle that's U.S.-Iran peace negotiations.
Despite the initial weakness, the charts still show GBP/NZD is caught between the 50% and 61.8% Fibonacci retracement levels of the January-February selloff, located at 2.2927 and 2.3052, respectively.
The zone straddles the 200-day moving average, currently at 2.2964, and we think the pair will continue to oscillate around here in the coming days. The zone is acting as a consolidative trap while the narratives driving sterling and the New Zealand dollar resolve.
In short, we're waiting for a shift in drivers to trigger a breakout.
For now, we sense that any breakout will be lower, which would be in sympathy with GBP/NZD's retreat from highs at 2.32, reached at the start of the month.
Near-term, GBP/NZD can ease back to last week's low at 2.2836, but the sense we get is that it's not ready to move decisively below here.
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For that to happen, we would likely need a material breakthrough in negotiations between the U.S. and Iran.
There are no adverse headlines regarding the Iran war to report this Monday; instead, there's behind-the-scenes activity that confirms a steady drumbeat towards another round of negotiations between the U.S. and Iran happening at some point.
"Expectations of an imminent de-escalation in the Middle East have supported the S&P 500’s sharp rebound from its March 30 low. Investor confidence has improved alongside earnings momentum, as the energy shock has not led to material downward revisions," says Magdalena Ocampo, Market Strategist, Principal Asset Management.
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Sure, the Strait of Hormuz is still closed, but there's an unquashable belief amongst investors that it will all be resolved in short order.
For the NZ dollar, which is considered a 'high beta' currency, that's supportive.
"We think growth should stay resilient, inflation is likely to undershoot market expectations, and there is adequate demand to meet higher supply of debt," says Mark Haefele, Global Wealth Management Chief Investment Officer at UBS Switzerland AG. "Our base case is that the growth drag from higher oil prices is manageable," he adds.
For the NZD, such an optimism is supportive.
This week brings with it a slew of important corporate earnings and numerous central bank decisions and the rule of thumb is that disappointments will weigh on the NZD and boost the GBP, while positive surprises will have the opposite effect.
"Today’s quiet calendar feels like the calm before the storm. Five central banks, including the Fed and the ECB, will meet this week, starting with the BoJ tomorrow, while Alphabet, Microsoft, Amazon, Meta and Apple will announce their results on Wednesday and Thursday," says Achilleas Georgolopoulos, Senior Market Analyst at Trading Point.
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Learn More →The Bank of England decision on Thursday will be of interest for the pound sterling leg of GBP/NZD. Here, we expect the Bank to hold rates and potentially push back against expectations that it will deliver at least two rate hikes this year.
This pushback on rates would weigh on sterling, particularly against the New Zealand dollar, given the RBNZ looks as though it will raise rates in the coming months.
In fact, much of the recent NZ dollar resilience we have seen of late has the RBNZ to thank.
Auckland Savings Bank, one of New Zealand's most important lenders, is now predicting a steady run of rate increases from the Reserve Bank of New Zealand that takes the OCR to 3.25% by year-end.
Rate hike expectations were a primary driver of NZD outperformance in January and February, and ASB's call suggests that dynamic has not run its course.
