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Bearish Bias for Pound / New Zealand Dollar Rate Predicted to Play Out this Week

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The GBP/NZD exchange rate is showing a triangle unfolding on the weekly chart; and we believe this could usher in a period of short-term weakness.

The triangle appears to be just completing its third ‘c’ leg higher as it has now reached resistance from the upper border line of the pattern at 1.7660.

Triangles normally have a minimum of five composite waves so the exchange rate will now probably fall in a fourth ‘d’ wave lower, to roughly 1.6000 at the lower boundary.

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But how will we know that the move lower has commenced?

A break below 1.7430 might provide sufficient confirmation that leg ‘d’ was in progress, with a target at lower at 1.72, 1.71 and then 1.70.

Week Ahead for the New Zealand Dollar

The main release for the New Zealand Dollar in the coming week is the result of the meeting of the Reserve Bank of New Zealand (RBNZ) at 20.00 GMT on Wednesday, March 22.

The universal consensus is that RBNZ will not implement any change in  monetary policy or shift rates from their current 1.75% level.

“Unanimous consensus expects the OCR unchanged at 1.75% and 12/14 expect 1.75% right through to year-end.  The 4-5 paragraph statement is likely to be as neutral as possible as any tinge of hawk will see the end of recent NZD underperformance.  Expect a contrast between solid domestic activity and risks of a potential trade war,” say TD Securities in a client note.

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The NZ economy remains relatively strong as a result of a constant influx of immigrants bringing more demand and productivity to the economy.

As noted by TD in the quote above, any note of hawkishness will likely result in upside for the currency.

The Trade Balance is out at 21.35 on Thursday, March 23.

The Global Dairy Trade Auction is out on the morning of Tuesday, March 21, and must not see any further deterioration or the Kiwi will likely sell off. Although dairy prices have risen over the last year in the last month they have plummeted and the decline must stop or it will hit the industry.

Sterling's Rally Built on Sand?

The Pound rallied following the Bank of England’s (BOE) last meeting because the market had not expected such widespread optimism amongst officials.

Kirsten Forbes, for example, voted for a rate hike and other officials voiced similar thought’s judging from the minutes.

“Other members noted that it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted,” said the meeting minutes.

But the BOE’s optimism does not reflect recent data, which has actually shown a slight deterioration over the preceding quarter warns to advisory service Capital Economics.

They note how the Purchasing Manager survey data, for example, is showing a GDP growth of only around 0.4% in Q1 against BOE forecasts of 0.6%.

Retail sales have also slowed.

“Early hard evidence such as the surprise dip in retail sales volumes in January, adds to the view that the near-term risks to the MPC’s activity forecasts may be skewed to the downside,” says economist Paul Hollingsworth at Capital Economics.

The imminent triggering of article 50 will officially kick-start the UK's exit of the European Union and usher in a period of uncertainty which is likely to impact on economic growth.

Sterling’s current rally may therefore be built on sand.

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The Week Ahead for the Pound: Inflation Data will be Key

As far as upcoming data releases go, the main release for the Pound is the February CPI due for release on Tuesday, March 21 at 9.30 GMT.

Market expectations for a rise to 1.8% are a little low according to both Capital Economics and TD Securities, who estimate a higher 2.1% and 2.2% rise year-on-year in Feb.

The main contributory factors are likely to be rising food inflation due to the weak Pound and the lagged effect of the rebound in oil prices.

Producer Prices in the UK, out at the same time are expected to show continued extremely high yearly gains in ‘Input prices’ due to the rise in imported component prices because of the weak Pound.

Capital expect Input prices to rise by 21.7% year-on-year.

Manufacturers are not passing the higher costs on, however, as output prices are only rising at a fraction of the level, of 3.5% currently, rising to 3.8% according to Capital.

“Meanwhile, the survey evidence suggests firms have been taking a hit to their margins. Indeed, the output prices balance of the Markit/CIPS survey has not risen by nearly as much as the input price balance. As such, we expect output prices to have increased only a little further, from 3.5% to 3.8%.,” said Holingsworth.

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On Tuesday, March 21 at 9.30 Public Borrowing data is released and should show a small 1.0bn rise in February.

Nevertheless, borrowing remains below previous forecasts – down 22% on the previous year allowing the public finances some breathing room.

Given the government’s U-turn on increasing National Insurance contributions from the self-employed and lower-than-expected borrowing, the government does now have a buffer it can use to stimulate the economy in case of a Brexit-related slowdown, factors Sterling’s current rebound may be based on.

The final big news release for the Pound is Retail Sales at 9.30 on Thursday, March 23.

“February’s retail sales figures are likely to suggest that consumer spending is on track for a disappointing first quarter,” said Capital’s Hollingsworth.

He further notes this appears to be as a result of a correlated fall in real earnings growth.

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The consensus market estimate is for sales to have risen by 0.4% month-on-month and 2.6% year-on-year, whilst Capital are slightly more optimistic seeing 0.5% and 2.7% rises respectively.

Notwithstanding this slightly brighter forecast the remain pessimistic about the outlook for Retail Sales in Q1.

 

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