The current GBP/NZD price chart is showing a compelling bias to further upside despite a poor start to the new week.
The pair has been moving in a fairly tight range between 1.7400 and 1.8000, but exhibiting consecutively higher lows as the range has developed, which is a bullish sign.
Given the steep up move from the October lows, we see a similar breakout higher eventually also emerging from the range.
Initially, however, we expect a rally up from the present level to the 1.8000 range highs.
A break above the 1.8075 level would then confirm a continuation up to a target at 1.8270 level where the R2 monthly pivot is likely to provide a rigid barrier to more upside, however, eventually, we see it too breached and the exchange rate moving as high as 1.8450 potentially.
A bullish Japanese candlestick pattern, called “rising three methods”, is on the weekly chart and indicates a higher probability that this week will be bullish.
Despite the charts suggesting further upside is possible, we must remember that these positive calls are technical in nature and they fail to take into account the unpredictable fundamental drivers that are guiding the British Pound.
GBP is struggling at the start of the new week as foreign exchange markets resign themselves to the fact the UK is to exit the single market.
The Pound to New Zealand Dollar exchange rate slipped from the week's opening level at 1.7593 to 1.7490 as markets digested Prime Minister Theresa May's much-watched weekend interview in which she confirmed her Government would be looking to take back control of the UK's borders once the country exits Europe.
This suggests the Government is willing to forfeit membership of the single market, access of which requires the free movement of European citizens.
According to economists, exiting the single market leaves the UK open to a longer-term economic growth rate that is below potential. Of course the economists could well be wrong - the UK could do well outside of Europe.
However, for now, the bet is that growth will be lower, and therefore the Pound is seen struggling.
"Independent GBP weakness is the main theme overnight... after PM May said in a weekend interview that she was not interested in “keeping bits of [EU] membership,” a comment widely interpreted as indicating that the UK will leave the single market when it leaves the EU," says Adam Cole, an analyst with RBC Capital Markets.
May has promised to reveal more details of the Government's position over coming weeks, the release of which will be the next major risk factor for Sterling.
Those with foreign exchange payments are looking at a GBP-NZD exchange rate that ranges between 1.6876 at the banks towards the mid 1.73s offered by independent specialists who are more competitive on the spreads they offer. Note that these rates are changing quite swiftly as volatility starts to rise.
Data to Watch for the Pound in the Week Ahead
We have some second-tier data due on Tuesday in the form of BRC Retail Sales which will provide some interest to traders.
However, concerns that the British shopper A) is living on credit and B) unlikely to be able to continue borrowing at the same levels due to signs of job insecurity and higher inflation, means the BRC Retail Sales Monitor in December may gain more interest than usual, when it is released at 00.01 (GMT) on Tuesday, Jan 10.
If it is particularly bad the Pound may retreat.
Also of importance will be Bank of England (BOE) governor Mark Carney’s testimony at the Treasury select committee on Wednesday, Jan 11 at 14.15.
There is a risk Carney may use the opportunity to give markets a ‘head’s up’ of an imminent rate cut according to ING bank’s Chris Turner.
Any such commentary could heavily weigh on Sterling.
Wednesday also sees the release of Manufacturing Production at 09.30 which is expected to show a rise of 0.5% from a minus figure previously.
Industrial Production, out at the same time, is expected to show a robust rebound of 0.7% from -1.3% previously.
The Trade Balance, also out at the same time, is expected to show the deficit widen to -11.4bn in November.
Don’t forget that there is a risk all through January that the Supreme Court may announce its decision on whether Theresa May alone can trigger article 50 and begin Brexit or whether she has to put it to Parliament first.
If she wins the case the Pound is likely to weaken; if she doesn’t the Pound may rise temporarily, but analysts are becoming increasingly sceptical about whether Parliament will have much authority beyond a simple yes/no vote to Brexit.
Previously it had been argued they might have input in the negotiating stance but this seems less likely now according to ING’s Patel, who recently said they would probably just have a “three line bill” which included a vote on Brexit and no say on implementation.
In terms of data for the New Zealand Dollar, it is a quiet week, with the first release at 21.45 GMT on Monday 9 in the form of Building Consents in November.
On Thursday, January 12 at 21.45 Electronic Card Sales are released and are expected to show a 1.0% rise month-on-month in December.