Pound-to-New Zealand Dollar Rate Forecast: Resumption of Upside Possible

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- GBP/NZD recovers after steep sell-off

- Market action remains volatile, but continuation of breakout possible

- NZD to eye dairy price update this week

The Pound-to-New Zealand Dollar rate is seen trading at 1.9737 at the start of the new week.

The New Zealand Dollar saw some weakness last week following an update from the Reserve Bank of New Zealand which kept alive expectations that the next move on interest rates might actually be a cut.

According to our latest technical studies, further gains are possible.

We said the pair's breakout from its triangle-type range at the beginning of September probably indicated a move extending all the way up to a target at 2.04, generated by the typical technical method of extrapolating the height of the triangle at its widest point higher by 61.8%.

However, the exchange rate's sharp 1.0% slump suffered on September 21 - in response to Theresa May's assertion that Brexit talks had reached impasse - suggested the breakout we had identified was in fact a false one.

We may have been too hasty in calling the recovery's demise on the back of this sharp knee-jerk slump in Sterling.

The breakout pattern remains valid and now see a possibility the pair could still resume its uptrend and if it manages to break above the previous breakout highs at 2.003, continue up to, and fulfil the old target at 2.04.

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The New Zealand Dollar: What to Watch this Week

The main fundamental driver for the Kiwi in the week ahead is likely to come from external sources, possibly linked to the outlook for China and its current trade spat with Washington.

Adverse news for China or a worsening in trade relations between the two trade powers is likely to impact negatively on the Kiwi.

China is the largest importer of New Zealand products so its health is very much dependent on China's and any adverse news is likely to weigh negatively on the Kiwi.

From a hard data perspective, the key release for the Kiwi is the global dairy trade auction on Tuesday at 14.30 B.S.T.

The auction establishes prices for dried whole milk powder among other things, which is important for the New Zealand Dollar because it is New Zealand's largest export. The price of dried whole milk has declined markedly since the start of 2018, with a negative effect on farmers and the economy, if it continues lower it could start to weigh on the Kiwi too.

There is a small chance the Kiwi could also be impacted by business sentiment data out on Monday. The NZIER business sentiment gauge and capital utilisation measure for Q3 are both out on Monday at 22.00.

Business confidence plunged -20% in Q2 so investors will want to see whether the trend has continued in Q3, and if it did the Kiwi could suffer.

Given how cautious the central bank is about the outlook and the risk they might lower interest rates, early data for Q3 such as the NIEZR releases could have a disproportional effect on monetary policy expectations and the Kiwi.

The Pound: What to Watch this Week

The main focus for the Pound in the week ahead will be discussions focused on Brexit at the Conservative party conference which starts on Sunday, with the most attention on Theresa May's speech at the end of the conference, on Wednesday, October 03.

May is expected to continue to try to generate support for her Chequers' proposal despite rejection from both the EU and eurosceptics in her own party.

The consensus amongst senior conservatives is for a Canada-style trade deal instead which if it materialises could weaken the Pound.

"Brexit developments can buck the market at any moment, either way," says Robert Howard, who sits on the foreign exchange desk at Thomson Reuters. "Fortune may favour the brave, but speculators holding or mulling Sterling longs must be wondering about just how bold they should be as the annual UK Conservative Party conference looms."

Traders will be wary that the Pound has suffered at previous conferences.

Data from Reuters shows the Pound fell 3.75 cents in the first week of October last year, after a disastrous keynote conference speech by PM Theresa May.

"Sterling suffered from May's misfortune, amid perceptions that her hold on power had never looked weaker. A year earlier, the Pound fared even worse after May's conference message was perceived as signalling that Britain was heading for a hard Brexit," says Howard.

That first week of October 2016 ended with a "flash crash" for GBP, which saw cable tank to 1.1491 – its lowest for 31 years.

The main 'hard' data release for the Pound in the week ahead is likely to be Purchasing Manager Indices data (PMIs) for the manufacturing, services and construction sectors.

Manufacturing PMI, an indicator of activity in the Manufacturing sector, is forecast to slow in September, falling to 52.5 from 52.8 in the previous month of August, when it is released at 9.30 B.S.T on Monday.

Services PMI is forecast to fall to 54.0 from 54.3 when it is released at 9.30 on Wednesday.

Construction PMI is expected to decline to 52.5 from 52.9 when it is released on Tuesday.

PMI's are survey-based indicators; a result above 50 signals expansion and below 50 contraction.

Other data for the Pound, includes the Nationwide house price index (HPI), out at 7.00 on Tuesday, and the Halifax house price index, out at 8.30 on Friday.

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Lock in Sterling's current levels ahead of potential declines: Get up to 5% more foreign exchange for international payments by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here