Pound-to-New-Zealand-Dollar Rate in the Week Ahead: Uptrend Closing in on Target of 2.04

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- GBP/NZD rises to within an inch of target at 2.04.

- Pair to meet target at 2.04 but rally may stall after.

- Brexit drives GBP, global environment dominates NZD.

The Pound-to-New-Zealand-Dollar rate has risen strongly of late and will continue on to our target this week but the rally could stall soon after.

GBP/NZD has finally broken out of the triangle-shaped consolidation range it was trading in since just before the end of 2017, thanks to improving Brexit headlines and some weak New Zealand economic data last week.

It is close to our upside target of 2.04 which, conservative and based on the height of the channel extrapolated by 61.8% from the breakout, we expect the market will hit this week.

However, we won't risk forecasting more upside as there is a chance the rally will stall at or near 2.04.

Above: Pound-to-New-Zealand-Dollar rate shown at weekly intervals.

The relative-strength-index (RSI) indicator in the lower pane of the above graph, for example, is giving a reading of 68. This is very close to overbought levels (above 70). When the RSI enters overbought territory it is a signal not to open any more bullish bets because there is an increased risk the price might pull-back.

Another reason for caution is that triangles often form just before the final move in a trend. This could mean the above referenced breakout is the final move in the pair's uptrend. Yet how long that final move might be is impossible to tell.

We would only advocate taking a long position if the pair pulled back and formed a bullish candlestick in the 'buyzone' between the 10 and 20 period moving averages (MA), on lower timeframes such as the 4-hour or 1-hour charts. 

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The New Zealand Dollar: What to Watch

The main data events for the New Zealand Dollar (Kiwi) in the week ahead are the release of Chinese trade balance and New Zealand PMI data.

China's trade balance is expected to show the nation's surplus fall to $20bn in September, from $27bn in August. Import data showing transactions with New Zealand will of particular importance to the Kiwi. Currently, analysts expect imports to decline from 20%, to 15.3% of total trade during the month.

The Business NZ Manufacturing PMI for September is released on Thursday at 22.30 London time. There are no forecasts for the index although the previous reading came in at 52 for August, up from 51.2 previously.

PMI is short for 'purchasing manager index' and is a survey-based gauge of activity among Kiwi businesses. A result above 50 indicates industry expansion while a number below 50 suggests contraction.

The only other release of note in the coming week is electronic card retail sales in September, out on Tuesday at 22.45. There is no forecast. Sales rose 1.0% in August.

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The Pound: What to Watch this Week

All eyes now turn to a meeting of European leaders at a dinner on October 17 when they review the state of negotiations with the U.K. ahead of the October European Council summit commencing on October 18.

"In October we expect maximum progress and results in the Brexit talks. Then we will decide whether conditions are there to call an extraordinary summit in November to finalise and formalise the deal," European Council President Donald Tusk said at the Salzburg informal summit.

Expect market nerves to remain piqued over the next week as headlines, rumours, optimism and disappointment create an unstable environment for traders to navigate.

"Brexit remains the key driver for the GBP and uncertainty related to the outcome is likely to keep the GBP volatile," says Mikael Olai Milhøj, a foreign exchange strategist with Danske Bank.

The president of the European Commission, Jean-Claude Juncker, has meanwhile said on the weekend he is sure a Brexit agreement could be reached in November, if not sooner.

Jean-Claude Juncker told three Austrian newspapers that Brexit without a deal "would not be good for the UK, as it is for the rest of the union".

He added:

"I assume that we will reach agreement on the terms of the withdrawal agreement. We also need to agree on a political statement that accompanies this withdrawal agreement - we are not that far yet. I have reason to think that the rapprochement potential between both sides has increased in recent days, but it can not be foreseen whether we will finish in October. If not, we'll do it in November."

At the moment there appears to be a lot of support for a Canada +++ arrangement even from within Theresa May's Conservative party, so if the proposal is broadly well received, it could be a big moment for negotiations and a concomitant rise in GBP. Of course, the risk of a rejection is also quite high, and, therefore, a fall in GBP.

The question of the Irish border remains a sticking point but the UK has said it will propose a solution in the week ahead so there may be movement from news about that too.

On the data front, the main release is probably going to be GDP data, which is forecast to show a 0.1% rise in August, when it is released at 9.30 B.S.T on Wednesday. In July GDP rose 0.3%. A higher than expected result would help GBP.

"Things are looking rosier for the third quarter and there should be more evidence of this from the monthly GDP estimates due on Wednesday. UK GDP is expected to have expanded by 0.1% m/m in August, to produce an annual figure of 1.5%," says a preview from FX broker XM.com. "On a 3-month basis, growth is forecast at 0.6%, which would match July’s rate and point to growth of a similar amount for the third quarter."

Another major release for the Pound is likely to be the trade balance in August, which is expected to show a -10.9bn deficit when it is released at the same time on Wednesday.

Industrial and manufacturing production are also out at the same time and are both forecast to show a 0.1% in August compared to the previous month.

Finally, the Royal Institute of Chartered Surveyors (RICS) house price balance is out just after midnight on Thursday morning and the retails sales monitor for September is released by the Consortium of British Industry (CBI) just after midnight on Tuesday morning.

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