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Pound-to-New Zealand Dollar Rate Forecast for the Week Ahead

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The scheduling of major releases for both currencies in the GBP/NZD exchange rate indicates a potential for a potentially volatile week ahead.

The Pound-to-New Zealand Dollar exchange rate has rallied strongly in January and we expect it to continue until the exchange rate reaches at least as high as the December 1 highs at 1.9843.

Our studies of the market via the charts suggest a break above the 1.9466 highs is possible with the move suggesting the prospect of a continuation higher to the aforesaid target.

We think the correction lower in the exchange rate during December was just that - a correction - and now the exchange rate is resuming its longer-term uptrend.

Past experience and my own research suggests the December correction was probably a corrective Elliot wave 4 and the current January rally is a wave 5.

Wave 5's almost always retrace the losses during wave 4 and reach the top of wave 3 (see chart below) which in this case is the December 1 highs.

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Data and Events to Watch for the New Zealand Dollar

The week ahead is busy from a data perspective for the New Zealand Dollar and has the potential to cause the pair a considerable level of volatility.

The main event of significance on the calendar is the Reserve Bank of New Zealand (RBNZ) rate meeting at 20.00 GMT on Wednesday, February 7.

A decision to raise interest rates would be positive for the Kiwi, however, this is not expected, instead investors will focus on the contents of the accompanying statement for signs of what the RBNZ may be planning such a move in the future.

Any hints that the date of an interest rate rise is being bought forward would be highly supportive we believe; particularly now that domestic political risks associated with last year's change in government have faded.

It has been three months since the last RBNZ meeting and during that time domestic data has been on the soft side except for an improvement in the trade balance which crept into surplus in December.

Despite the poor data, the Kiwi has risen strongly which suggests it may be out of sync with poor fundamentals and therefore could weaken.

"While the data suggests that the RBNZ should be slightly less optimistic and more critical of the currency's strength, the RBNZ will usher in a new central bank governor in March (Adrian Orr) as right now, Grant Spencer is only acting governor so he may not want to rock the boat," says BK Asset Management's Managing Director Kathy Lien.

"Regardless, the RBNZ meeting will be an important event to watch. Q4 employment numbers will be released the day before and could help shape expectations for the rate decision. Friday's sell-off marked the strongest one-day sell-off in NZD/USD since

October and the decline is likely to continue in the coming week," she concludes.

Other important data in the week ahead is the global dairy auction on Tuesday at 14.30 which is when the price of New Zealand's largest export - Dairy products is set. The most recent result showed a robust 4.9% rebound in prices after they lost ground steeply in 2017, however, more gains are required to support the outlook for exports and drive up the Kiwi.

Employment data is the other significant release, out at 21.45 on Tuesday.

The market is expecting a rise in the unemployment rate to 4.7% in Q4 from 4.6% previously.


Data and Events to Watch for the Pound

The main event in the week ahead for the Pound is the Bank of England (BOE) rate meeting on Thursday, Feb 8 at 12.00 GMT.

Analysts do not expect a change in interest rates so the focus instead will be on attempting to guess when the next change will come by analysing voting patterns, the wording of the statement and governor Carney's verbal responses to questions in the press conference after.

If the evidence points to a rate rise getting more likely then the Pound will rise; if not then it will fall.

Brexit risks continue to cause uncertainty about the outlook and weigh on the BOE's reaction function, and given those risks have not changed substantially, little change is expected, and possibly a muted response from Sterling.

The other main event is the release of the BOE's Quarterly Inflation Report at the same times as the meeting, and given inflation is one of the main factors which lead to higher interest rates, and interest rates are positively correlated to the Pound this too could impact on Sterling.

If economic growth and inflation forecasts are revised higher expect Sterling to catch a bid.

"We have long-argued that interest rates would rise somewhat faster, and sooner than markets expecting. Recent comments by Governor Carney offer tentative support to this view and suggest that February’s Inflation Report could strike a more hawkish tone than is anticipated," says Paul Hollingsworth economist at Capital Economics.

Inflation is currently 3.0% and has been caused mainly by the depreciation of Sterling since the EU vote in June 2016. The BoE has said it is willing to allow inflaton to overshoot for a limited period before tackling it, however, Hollingsworth thinks they may start to show an impatience, given the stronger-than-expected performance of the economy. Such a change would be expected to lead to a modest rise in Sterling.

Other significant data in the coming week includes the services sector PMI out on Monday at 9.30 and Halifax house price data for January out at 8.30 on Tuesday. Industrial, manufacturing and trade data round off the week.

Markets are expecting a reading of 54.3 from Monday's service sector PMI - anything better will likely set Sterling on a strong footing at the start of the new week, while disappointment could add to the bearish tone.

"While most of the early data was suggesting we could see the services sector run flat, the weak prints on both the manufacturing and construction PMIs last week now points to the Services PMI declining from 54.2 to 53.2, versus a consensus of 54.0, though we suspect that may likely drift lower by the time of release. The January PMIs so far suggest the adjustment in the housing sector persisted into January while more of the demand was coming from external sources rather than domestic, all suggesting no reason the Services PMI should outperform the softer January data," says a note on the matter from TD Securities.

The Halifax data may garner interest because last week's Nationwide data showed an unexpected surge in house prices in January, which lifted Sterling, and the market will be looking to the Halifax data to corroborate it.

Friday, meanwhile, sees the release of manufacturing and industrial production and the trade balance for December, all out at 9.30.

Markets are eyeing monthly industrial production to have slid 0.9% in December with the manufacturing production number showing an increase of 1.2%.

Trade data should show a balance of -£11.60BN as the UK continues to import more than it exports.

With regards to the above, the manufacturing data is expected to have the most impact on Sterling.

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