The New Zealand Dollar and Pound appear to be entering a period of consolidated trading.
The exchange rate has been flat since the Pound's strong recovery ended on November 11 - GBP/NZD has subsequently oscillated around the 1.76 region with spikes and dips reverting back to this point.
At the time of writing the pair is at 1.7658 confirming we are right in the middle of the range.
As consolidation periods often tend to be resolved by a notable breakout, we ask where will the next big could go?
To answer this, we have studied the charts and are quietly confident that a 'broadening formation' is under way.
A closer look at the GBP/NZD reveals the pair has carved out a megaphone-shaped price action patttern that widenins as it expands outwards rather than contracting as is the case with triangles.
Broadening formations are usually composed of a minimum of five waves annotated a,b,c,d,e.
This particular broadening formation has almost completed the fifth ‘e’ wave down, and so it is probably close to finishing.
Wave ‘e’ is likely to end at the bottom of the range at 1.7400 and the 50-day MA.
Once it has finished the exchange rate will probably breakout either higher or lower.
The big question is which way?
This is not yet clear and I would wait for confirmation first, but a move lower is marginally more likely.
According to Elliot Wave theory, the presence of a broadening formation in this position could mean it is a broadening ending diagonal pattern.
These always punctuate the end of a move.
It would, therefore, signal that the correction back from the October lows has almost finished and the longer-term trend down will probably resume.
Those with international payment needs on this pair should consider placing a limit order accordingly to protect against GBP downside.
The bearish looking MACD corroborates this after looping under its signal line.
A move below the 1.7200 level would be required for confirmation, but if so then it would probably move down to a target at 1.7100, generated by extrapolating the height of the consolidation lower.
A less likely but not yet to be discounted alternative is a breakout above the highs of the pattern, confirmed by a move above 1.8200 could signal a clear upside breakout from the range, with an initial target at resistance from the R1 monthly pivot at 1.8300.
Fundamentals Support NZ Dollar Strength
Our technical analysis is underpinned by fundamentals which suggest the GBP/NZD pair will weaken based on a strengthening of the NZ Dollar.
Strategists at Westpac argue the New Zealand Dollar is a conviction Buy against an already-strong US Dollar.
Westpac’s Imre Spiezer notes:
“If anything conviction levels on the USD and NZD have firmed. Our model score drives a good amount of the NZD enthusiasm, led by steady gains in dairy prices."
Supporting the outlook for increasing NZD strength are the most recent Global Dairy Trade Auction prices, which showed dairy prices rising by 3.5%, and marked a continuation of the uptrend in prices which started in the Spring.
The dairy sector is New Zealand’s largest commercial sector.
Westpac also see gains on the horizon after the release of Q3 GDP data on December 22, which they forecast as showing a higher-than-expected 3.6% growth rate.
“We leave a buy order at 0.7130, stop 0.7060 (NZD/USD)," says Spiezer.
Clearly, if the Kiwi is expected to rise against the Dollar, which is one of the strongest currencies in the FX firmament then it must surely be expected to rise against the weaker Pound.