- GBP/NZD continues to trade within a tight range.
- But a range- breakout may now be on the horizon.
- BoE, dairy prices, retail sales and trade data in focus.
© Naru Edom, Adobe Stock
The Pound-to-New Zealand-Dollar rate remains stuck in a tight range but the formation of a narrowing triangle pattern on the charts suggests a breakout is now in the cards.
The upper and lower boundaries of the triangle are reinforced by the 200 and 50 week moving averages (MAs) respectively, which are formidable obstacles for the exchange rate to break through.
Major moving averages tend to attract short-term technical traders who often fade any approach toward these levels, leading to periodic pull-backs in prices.
Above: Pound-to-New-Zealand-Dollar rate shown at weekly intervals.
The GBP/NZD triangle has now completed its five constituent waves (labelled a-e), which is the minimum number required for a triangle to be complete. This increases the probability of a breakout occurring soon.
The trend prior to the formation of the triangle was bullish, which suggests a bias toward an upside breakout and continuation higher. However, the fact these component waves of the triangle are steepest on the way down also suggests there is scope for a downside breakout.
A breakout higher would be confirmed by a move above 2.00 and could take the market all the way to an upside target of 2.04. Whereas a break below 1.89 would probably signal a downward move toward 1.82 is in prospect.
Triangle breakout targets are generated by extrapolating the height of the triangle at its widest part, by a ratio of 0.618 from the breakout point. 0.618 is known as the 'golden ratio', a mathematical constant found to govern proportionality in natural phenomena and also in financial market price movements.
The Pound: What to Watch
The main event for the Pound in the week ahead will be testimony from Bank of England (BOE) governor Mark Carney the Parliamentary Treasury Select Committee, on Wednesday, August 22, covering the inflation and economic outlook.
Although the BOE raised interest rates at the start of August, the chances of a further hike in the short term are generally viewed as low mainly given the increasing uncertainty around Brexit. Carney recently said the chances of a 'no-deal' Brexit were "uncomfortably high" and that this presents a risk to the economy.
The Pound is highly correlated with interest rates because of their influence over foreign capital inflows. Higher rates tend to attract greater inflows of capital, which raises demand for Sterling. Therefore, traders will be analysing Carney's statements for clues on when rates might change again, even if more clarity is unlikely.
The other major release for the Pound is the Confederation of British Industry (CBI) Industrial Trends report for August, with overall activity balance forecast to decline from 11.0 to 10.0 when the report is released on Tuesday, August 21 at 11.00 B.S.T.
CBI surveys are often closely followed by the market due to their timeliness and can provide early insight into activity within the economy.
The New Zealand Dollar: What to Watch
The main event for the new Zealand Dollar (kiwi) in the week ahead is the global dairy trade auction set for Tuesday afternoon.
The auction establishes prices for dried whole milk powder among other things, which is important for the New Zealand Dollar because this is New Zealand's largest export. A rise in prices would drive the Kiwi higher and vice versa.
Second-quarter Kiwi retail sales are also due out Tuesday evening at 23.45 London time. Consensus is for a rise of 0.4%, up from 0.1% at the beginning of the year. Core retail sales are expected to rise 0.8%, up from 0.6% previously. A higher than expected result would be positive for the economic outlook and therefore, the Kiwi.
The New Zealand trade balance in July is expected to show a deficit of -$400 mn, up from -$113 mn previously, when the number is released Thursday at 23.45 London time. A deeper deficit would signal falling demand for the Kiwi on international goods markets and so would impact the currency negatively.
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