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Pound-to-New Zealand Dollar Rate 5-Day Forecast: Favouring Sterling in a Data-Heavy Week

- Barclays trade of the week is "long" GBP/NZD

- Dairy prices, inflation data dominates NZ calendar

- UK wages, inflation and retail sales could cause volatility in GBP/NZD

A decent enough start to the week for Pound Sterling against the New Zealand Dollar is being seen at the time of publication, with the GBP/NZD exchange rate rising to 1.9386 having been on the rise for three consecutive trading days now.

The 2018 trend is higher; Sterling triggered a fresh low at 1.86209 on February 12 from where it has steadily risen back to hit a high at 1.9642 on March 21.

The currency has however since faded back into the 1.93s where we see it today, so those transacting in and out of New Zealand Dollars will be looking at familiar rates.

However, we can still see that the overall multi-week trend is up and there is little reason at this point to expect the British Pound to come under sustained pressure:

Pound to New Zealand Dollar exchange rate chart

We would therefore be inclined to favour Sterling to go higher on momentum, even if it is likely to trade around familiar levels.

"There is quite a lot of event risk for Sterling this week, which could lead to plenty of volatility. Nevertheless, markets are trading with a bid tone," says a note from ANZ Bank, adding that price action is likely to leave the NZ Dollar on "the back foot" against Sterling.

ANZ see upside resistance for GBP/NZD at 1.9685 and see support down at 1.88.

Analysts at Barclays have meanwhile recommended traders go "long" on GBP/NZD as their "trade of the week", expecting Sterling to outperform.

"Long GBPNZD, given its low sensitivity to sentiment swings, positive seasonality and fading political uncertainty for the GBP, the the possibility of softer-than-expected inflation print in New Zealand," say Barclays in a note to clients ahead of the new week.

An entry point for the trade is seen at 1.9354, a target is set at 2.00 and a stop-loss is set at 1.905.

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New Zealand Dollar: Key Events to Watch this Week

The latest Global Dairy Trade auction will be in focus on Tuesday with investors keen to gauge where prices of New Zealand's premier export are headed.

After a strong start to the year, prices have been seen heading lower since February 20, but the declines have not been of a magnitude to prompt weakness in the currency.

If prices increase on Tuesday, we would suggest perhaps a bottom might be in, however a steeper decline than April 3's -0.6% could cause a wobble as it is suggestive prices could be turning lower in a more sustained fashion which could ultimately impact on New Zealand's terms-of-trade.

GDT results

"We will get data from the GDT auction this week, with higher supply set to test demand. WMP supply has been lifted for the second auction in a row, with improved pasture conditions ensuring a solid finish to a challenging production season. The next several dairy auctions are worth watching as they are always critical in setting the opening 2018/19 milk price forecast at end of May," says a preview note issued by ANZ Bank ahead of the release.

Mid-week will see the release of the latest set of New Zealand inflation data, the general rule-of-thumb being that a beat on economist expectations will boost NZD and a lower reading will harm the currency.

The thinking is that higher inflation would prompt the Reserve Bank of New Zealand into raising interest rates sooner than they are currently planning, and expectations for higher interest rates tend to be supportive of a currency.

Economists are forecasting quarterly inflation to read at 0.5%, up on the previous quarter's 0.1%.

Annualised inflation is expected to clock-in at 1.1%, down on the previous quarter's annualised rate of 1.6%.

"We expect a dip in headline inflation due to temporary factors, in the context of generally subdued price pressures," say ANZ.

ANZ think inflation will increase only gradually with their forecast eyeing inflation to increase to 2% by June 2019 if the economy evolves as we expect.

"This inflation outlook implies the RBNZ will be playing wait-and-see for a while. The RBNZ expects not to have to increase interest rates until mid- 2019 – an assessment with which we agree," say ANZ.

 

Sterling's Week Ahead

A big week in terms of data for the UK in the coming week with labour market, inflation and retail sales numbers all on tap.

The Pound has enjoyed a strong start to 2018 as concerns and uncertainties relating to Brexit fade. As a result, analyst Viraj Patel at ING Bank N.V. believes Sterling will now start to pay more attention to data. "It appears that we’re back to good old-fashioned UK data watching to determine the short-term direction for the currency," says the analyst. "The week ahead shouldn’t disappoint here given the array of key data releases to watch out for."

On Tuesday, April 17 we have labour market data with markets looking for employment to increase by 13.3K in the quarter to March.

The Unemployment rate is forecast to stick at 4.3%.

Most important for the Pound will be wage data; as it is wage data that the Bank of England will be watching when it comes to raising intent rates with the rule of thumb being that higher wages should prompt interest rate wages which are in turn supportive of Sterling.

The average earnings index, with bonuses, is forecast to have risen 3% in February. If this number is missed, expect the Pound to struggle.

"We think signs of firming wage growth next week may seal the deal for a May BoE rate hike," says Patel.

Inflation data on Wednesday, April 18 will also be key with economists forecasting the headline CPI rate to be at 2.7%, unchanged from the previous month.

Calling Sterling's reaction to this is tricky as the traditional rule of thumb is higher inflation = a positive reaction in the Pound as it should mean the Bank of England will need to deliver more interest rates. This should still be true.

However, falling inflation also means the squeeze on consumers is fading as pay growth starts to finally creep ahead of inflation - and this is good for the economy. And what is good for the economy is good for the Pound.

The inflation data could therefore offer a win-win for Sterling.

Finally, markets will be watching retail sales on Thursday, April 19 with economists forecasting a reading of -0.5% thanks to the inclement weather seen in March.

"Retail sales figures (Thursday) should reveal that the heavy snowfall in March hit the sector hard, with sales volumes contracting sharply on the month says Liam Peach, an economist with Capital Economics.

We therefore reckon markets are likely to discount seasonality into this month's data and instead look for next month's data for direction.

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