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Pound-to-New Zealand Dollar Rate Week Ahead: Technical Forecast, Data and Events to Watch

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The Pound has pulled back against the New Zealand Dollar of late but our studies note the exchange rate is still pointed higher however key data releases in the week ahead will keenly watched.  

Our latest technical studies of the Pound-to-New Zealand Dollar exchange rate notes the market has corrected back in the midst of a pretty strong short-term uptrend.

Using charts to forecast future direction in financial assets can be a useful method of determining concrete targets as we can identify the regions traders are likely to lay their buy and sell orders and where the exchange rate is therefore likely to turn or accelerate a trend.

The bull trend in GBP/NZD seen over recent weeks has broken above the May highs and remains intact despite correcting back in a three-wave abc pattern, which looks like a zig-zag and is a common corrective pattern found in financial markets:

GBP NZD Nov12

Now that the abc is probably finished the pair will probably resume its uptrend and extend even higher.

A break above the 1.9436 highs would confirm a resumption to a target at 1.9500, which is likely to act as a ceiling, obstructing further gains because it is an important psychological level due to being a major round-number, which means it will encourage more than average profit-taking and therefore selling pressure. 

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Data and Events for the New Zealand Dollar

There is a conspicuous lack of significant, tier one, data in the week ahead from New Zealand so the focus may be on politics rather than releases.

Markets were taken by surprise by the more confident tone of the central bank at its November meeting where it decided to bring forward the date when it expects to raise interest rates.

When interest rates rise they support the currency and vice versa when they fall.

This is because when they are higher they attract greater flows of foreign capital due to the draw of higher potential interest returns, which increases demand for the currency.

The central bank of New Zealand now thinks it will raise interest rates in Q2 of 2019 due to an earlier pick up in inflation.

This is partly because recent better-than-expected growth data and the more generous public spending expected from the new Labour coalition government will raise inflation more quickly, which will lead to the central bank hiking rates sooner.

Yet a potential fly in the ointment for hopes of higher interest rates is the central bank itself, which may have to undergo reform.

One of the policies of the new government is to change the remit of the central bank from merely worrying about inflation to also worrying about full employment.

If 'full employment' is added as an extra specification to the central bank's remit, it will probably lead to a more growth-friendly policy, which generally translates into keeping interest rates lower for longer because that encourages more borrowing and investing, which helps create jobs.

More of these issues may become clearer - especially regarding the central bank's remit in the coming week and could impact on the exchange rate.

Data and Events for the British Pound

Political factors will remain a key focus in the coming week.

They will probably revolve around two major issues: the first is the survival of the Prime Minister and the second the passage of the 'withdrawing bill' through parliament, which is the piece of legislation which will take the UK out of the EU.

The latest reports suggest that the number of rebel Tory MP's who want Theresa May to quit the party leadership has grown to 40 which is only 8 short of the number needed to trigger a leadership challenge.

If a mutiny emerges in the week ahead, it will destabilise the political and economic outlook and likely weigh heavily on the Pound - the Pound dislikes uncertainty and questions over the UK's political direction would weigh heavily, particularly as the prospect of an anti-market Labour party Government taking power becomes more likely.

Instability in the UK Government also of course has impacts on the UK's ability to negotiate on Brexit which remains critical to the Pound's outlook.

A change of leadership in the Conservative party would surely delay Brexit negotiations, while another general election would certaintly knock months of the timeline.

The other great issue is the 'withdrawal bill' which passes through Parliament this week. MP's will be debating final amendments to the bill - which provides the domestic legislation required to take the UK out of th EU - in the coming week. 

One major point of contention is whether the bill should be changed to allow MP's a vote on the final Brexit deal negotiated with the EU. A number of Conservative MPs are expected to vote with Labour to force through changes to the bill, or at the very least block passage of the bill.

If this is indeed the case then the Government's fragile majority in the Houses of Parliament will be exposed, once again drawing questions over the Government's longevity.

Hard Data

The main release in the coming week is inflation data on Tuesday, November 14, at 09.30 GMT, with October expected to see a rise of 3.1% compared to a year ago, which would represent a rise of 0.1% from the previous 3.0% result and see inflation hitting a new 2017 peak.

Such a rise in inflation would probably be marginally supportive of the Pound as it would increase in the chance the Bank of England (BOE) will raise interest rates again, perhaps even sooner than previously expected.

Nevertheless, the BOE themselves have forecast inflation peaking at 3.1% in October - but then rolling over - so it would take a sustained rise for several months to really support the Pound - or a shock rise in October of over the 3.1% expectation.

Higher interest rates strengthen currencies because they attract more inflows of foreign capital from global investors drawn by the promise of higher interest returns - and vice-versa with lower interest rates.

Central banks control the base interest rate which all other banks use to set their interest rates.

When inflation is too high central banks raise interest rates to bring prices back down by encouraging saving over spending and discouraging borrowing by making it more expensive.

Another major release for the Pound over the next five days is employment data on Wednesday at 9.30 GMT.

The main focus will not be on the Unemployment rate, however, unless it is widely divergent from estimates, but rather on wage data.

This is because earnings are directly linked to inflation with a pick up in the former leading to a rise in the later.

Therefore a strong pick-up in earnings (Ex-bonus) which were 2.2% previously and are expected to moderate down to 2.1% would help Sterling, and vice-versa for a fall.

The final major release of the Pound is Retail Sales data on Thursday at 9.30.

On a monthly basis Retail Sales both Core is expected to rise from very depressed readings in September of -0.7% and -0.8% respectively, rising to 0.1% for both.

Compared to October last year, however - ie year-on-year -  they are forecast to show a -0.4% fall for Core and -0.7% for headline compared to 1.6% and 1.2% respectively in October 2016.

The data is significant for the Pound because a further contraction in Retail Sales will increase concerns about growth and mean it is less likely the BOE will put up interest rates, resulting in weakness for Sterling.

 

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