Pound-to-New Zealand Dollar in the Week Ahead: Uptrend Biased to Extend on Condition of Break of Highs
© Pavel Ignatov, Adobe Stock
- GBP/NZD establishes short-term uptrend
- More upside on condition of break above highs
- Pound on alert for potential Brexit vote
- Kiwi eyes China data
The Pound-to-New Zealand Dollar is trading at 1.9413 at the start of the new trading week after appreciating over 1.84% in the previous week; this takes the 2019 advance to 2.30%.
The gains came mainly as a result of a rise in the Pound, due to expectations the Brexit deadline will be pushed back, which has lessened the chances of a 'no deal' Brexit on March 29. The pair was also helped higher by New Zealand Dollar weakness due to a combination of a lower interest rate outlook and Chinese economic slowdown fears.
From a technical perspective, the outlook is marginally bullish due to the establishment of a short-term uptrend but the charts are showing mixed signals so the bullish forecast is on the condition that the exchange rate can successfully break above the 1.9542 February 28 highs.
A break above those highs, however, would provide the green-light for a continuation up to the next target at 1.9610.
The outlook is also more bullish after the break above the 50-week and 200-day moving averages (MA) which had previously limited upside for the pair.
Momentum, as measured by the RSI indicator in the lower pane of the featured charts, continues to be a little subdued but not enough to suggest a risk of a bearish turn.
One feature of the chart which makes us slightly cautious is the patterning of the move up from the Feb 15 lows, which looks like a complete ‘abcd’ pattern. In the event the move is such a pattern it could signify a more bearish outlook since at their conclusion these patterns tend to result in a reversal, in this case, back down.
Another chart characteristic that makes us more cautiously bullish than we would otherwise be is the thick layer of resistance just above the current highs in a zone roughly between 1.94 -1.97. A clearance above this zone would signify a more bullish outlook for the pair.
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The New Zealand Dollar: What to Watch
The most important data release for the Kiwi in the week ahead is probably not from New Zealand, but rather China, in the form of Chinese trade data, since - like Australia - New Zealand’s main trading neighbour is China so the state of the Chinese economy has a direct impact on NZ.
Recent China growth fears have hit the Kiwi as well as concerns about the trade war with the U.S. Although these eased in the previous week after president Trump decided to delay the imposition of higher tariffs on Chinese imports, the possibility of an escalation still remains a risk for investors.
Chinese trade data in February is out on Friday, March 08, at 3.00 GMT, and is expected to show a fall in the surplus to $25.6bn from $39.2bn in January.
Exports are forecast a decline of -4.5% (from 9.1% prev) and Imports to fall -1.4% from -1.5% previously.
If trade data shows a deeper-than-forecast reduction in the surplus it could weigh on the Kiwi.
Domestic data includes the fortnightly Dairy Trade Price index, out on Tuesday at 15.30. The index is compiled from prices achieved at the Global Dairy Trade auction held at the same time. The index rose 0.9% previously. It is significant because dairy products are NZ’s principle export so they affect the Kiwi.
Another key release is Manufacturing Sales in Q4, out at 21.45 on Thursday. These came out at -0.3% in the previous quarter.
The Pound: What to Watch this Week
The main releases for the Pound next week are services and construction PMIs for February, although, the possibility of an early meaningful vote on Theresa May’s latest Brexit deal remains an overarching risk.
If Theresa May can win concessions from the EU on making the Irish backstop temporary, she may bring forward the meaningful vote before the March 12 deadline date, which means it could happen as soon as next week.
Due to political manoeuvring, any deal she agrees has a higher chance of getting voted through than was the case in January when the deal was shot down by parliament. Brexiteers fearful of Brexit being reversed could be more prone to back May, provided she can get a legal concession on the backstop.
Last week Sterling rose sharply after the Prime Minister announced a series of votes would take place in the event of her Brexit deal being rejected: one of them would be a vote on requesting a delay to Brexit.
With parliament heavily skewed against a 'no deal' Brexit, markets expect a delay to be requested should May's deal fail: for Brexiteers such an outcome would be incredibly problematic as it could open the door to a series of events that results in a much 'softer' Brexit, or no Brexit at all. Suddenly May's Brexit is looking a whole lot more attractive. Last week we heard Jacob Rees-Mogg, the head of the European Research Group which is a cabal of Brexiteer Conservative Party MPs, was softening his stance on the changes required for the deal to get his backing.
“British Prime Minister Theresa May could bring the meaningful vote on her Brexit deal to Parliament early before the March 12 deadline if she manages to secure the legal assurances she is seeking from the EU that the Irish backstop would be temporary if triggered,” says Raffi Boyadijian, economist at broker XM.com. “There seems to be growing movement within MPs, particularly among Eurosceptics, to back the deal if May obtains the legal guarantee after she offered lawmakers a vote on ruling out a no-deal scenario and extending Article 50. Labour’s backing of a second referendum also rattled hardline Brexiteers who may now fear Brexit could be postponed or even aborted.”
The other main release for the Pound is services and construction PMIs. Construction is the first to be released, on Monday at 9.30 GMT, and is forecast to slow to 50.3 from 50.6 previously.
Services is out on Tuesday at the same time and is forecast to come out at 49.9 from 50.1 in January. The services sector accounts for over 80% of UK economic activity and is therefore the survey markets are most interested in and has the greatest market-moving potential.
PMIs are surveys of pivotal purchasing managers in companies within the target sector. They are a leading indicator for the economy. A lower-than-forecast result could weaken the Pound. The possible dip below 50 for the UK’s key services sector is particularly concerning since 50 is the dividing line between growth and contraction. Brexit is not the only determinant of Sterling. Now that fears of no-deal have eased economic data is playing a greater role too.
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