The GBP/NZD rate has formed a bullish continuation pattern after a strong move off the November 8 lows and looks likely to continue moving higher.
Sterling is on the front-foot against its New Zealand cousin following a bout of strength triggered by the Autumn Statement of November 23 in which the markets reacted to a pro-growth set of budget shifts announced by the UK's Chancellor Hammond.
GBP/NZD has since broken to 1.7774, its best level since October 6th.
The break takes the exchange rate out of a holding pattern and above the 100 day moving average, denoted by the red line below:
This is in itself a bullish development as it signals a potential shift in longer-term momentum.
The last time such a break occured was back in May and the pair rallied to highs at 2.20.
We anticipated this strength earlier in the week when our technical studies of the pair advocated for further advances having noted GBP/NZD has broken above a key downtrend line:
We had noted recently that the recent sideways trading pattern, in place for seven or so days, was forming a bullish flag pattern.
The flag signals the likelihood of further upside and we anticipated the pattern to resolve itself with a move higher.
The steep rally before the formation of the flag square, which is known as the ‘flag pole’ provides a tool for estimating the extension higher when the flag breaks to the upside.
This is done by extrapolating the length of the pole higher from the base of the consolidation.
A break above the 1.7800 flag highs would probably confirm a continuation higher towards a target at 1.8500 eventually, although 1.8000 would provide a more conservative target for traders.
More upside is forecast eventually as the pair has already shown several very bullish signs.
The steepness of the initial ascent is a long-term bullish reversal sign, the break above the major trend-line and posting three bullish reversal candlesticks in a row – are also all strong bullish signals.
NZ Dollar Could be Oversold Against the US Dollar
The NZ Dollar's outlook does also rest with moves in the headlineNZD/USD pair which has been under pressure over recent weeks as the US Dollar strengthened.
"After last week's selldown, the NZD sits slightly under-valued compared to our short term fair value estimate of 0.7170. There are only minor releases scheduled on the data calendar this week and with Thursday’s US Thanksgiving holiday, the currency could remain in a tight trading range over the rest of the week," says Jason Wong at BNZ in Aukland.
In the week prior we saw the kiwi dollar slide from 0.7112 to 0.7009 against the Greenback as the the Trump trade entered a second week.
It would appear that this trade is now fading, which should offer NZD bulls some confort going forward.
New Zealand Data Erring on the Negative
New Zealand Retail Sales disappointed in the third quarter after undershooting forecasts, showing only a 0.9% rise versus 1.1% forecast and 3.6% previous quarter.
Comments from RBNZ’s Deputy Governor Bascand reflected the slowdown in Retail Sales, after he commented that NZD consumers were holding back despite increased wealth from house price appreciation.
Overall he was optimistic about the economy, however, saying that it was not facing “secular stagnation” as some countries were.
The Pound has a strong start to the week after Theresa May sought to reassure business leaders that Brexit would not be a cliff edge moment.
This was followed by lower-than-expected Net government borrowing in October, which sets up the possibility of a more fiscally generous Autumn Statement from the Chancellor on Wednesday 23.