Pound-to-New Zealand Dollar Rate Week-Ahead forecast: Upside Potential as Pair Completes Triangle Pattern
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- GBP/NZD continues to move in narrow range
- Chart pattern suggests weakness on weekly chart
- U.S.-China trade talks main factor for Kiwi
The Pound-to-New Zealand Dollar rate is trading at 1.9388 at the start of the new week, 1.0% above where it was a week ago.
The technical outlook is on balance marginally bullish, especially on shorter-term charts, whereas the opposite is true when you scope out.
Starting with the daily chart we see a case for possibly expecting more upside.
The pair has formed a triangle-like pattern since the end of February. This is not a normal triangle either as one of the sides, the upper edge, is straight. This means there is a greater chance of an eventual upside breakout.
Another detail on the daily chart is the bullish pennant-shaped pattern which has formed within the triangle, and further indicates the possibility of more upside for the pair. Normally these patterns will move the same length as a the ‘pole’ again higher, suggesting the possibility of a breakout.
Yet, not far above the upper edge of the triangle is a tough resistance zone which is likely to limit further upside.
We would ideally like to see a clear break above this resistance zone before calling for a more concerted rally higher.
A break above the 1.9550 highs would signal a possible breakout but the heavy ceiling of resistance from the two large moving averages above recommends caution before forecasting more upside, and ideally we would like to see a clear break above 1.9750 level which is clearly above the zone before confirming a continuation higher to a target at 1.9900.
The weekly chart shows the pair remaining within an intact uptrend since the December 2018 lows, which is a bullish sign, given the old adage that the ‘trend is your friend’ and is, therefore, expected, on balance, to extend.
At the same time, however, the general structure of the market on the weekly chart lends itself to a more bearish interpretation overall.
Price action looks more inclined to another leg lower: the steep descent to the December lows followed by the more gentle recovery up to the February 2019 highs looks like a correction in a bearish trend rather than a reversal higher.
It is possible to transpose an incomplete ABCD or Gartley pattern, as they are sometimes known, onto price action o the weekly chart, and this would suggest the market could be close to turning lower.
The resistance zone is made up of the 200-week MA which is likely to encounter tough resistance at that level.
The 50-month MA shown clearly on the chart above is another level comprising the resistance zone which could be an obstacle to more upside.
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Fundamentals in Charge
While technical studies suggest GBP/NZD is poised to go higher near-term, we would not be surprised to see the exchange rate treading water as investors await the next twist in the Brexit saga.
This will probably be the EU summit on Wednesday 10 when member states will decide on whether or not to allow the UK an extension of article 50.
An extenion is almost a certainty, rather it is the length of any extension that is up for debate.
It is assumed they will but there is a tail risk of a rogue state vetoing the resolution and the UK then facing a hard Brexit on its existing official deadline of Friday, April 12.
Furthermore, we hear France, Spain and Belgium are ready to cut the chord with the UK and grant a short two-week extension that would allow both sides to prepare for a 'no deal' Brexit.
This would, if it comes to bear, pose significant downside risks for Sterling.
The consensus in the analyst community appears to be that the UK will end up having to have a general election since this could be the condition on which the EU grants a further extension.
Such an outcome may not be positive for the Pound as it raises the prospect of a victory for Labour, the benefits of which financial markets are sceptical due to what are seen as the current Labour party’s anti-free market leanings.
The New Zealand Dollar: What to Watch this Week
The main factor moving the New Zealand Dollar in the coming week is probably likely to be news concerning China - its largest trading partner - rather than anything domestic.
The chances of a breakthrough in trade talks between the U.S. and China are growing with each day. Such an outcome would give a strong lift to the Kiwi and would dovetail elegantly with the bearish technical outlook for the GBP/NZD pair over the lonter-term timeframe.
For the U.S. and China the upsides of doing a deal heavily outweigh the benefits - or lack thereof - of any 'cold' trade war. China has already experienced the consequences of tariffs in its worsening trade figures while the approaching presidential elections in the U.S. are an incentive for Trump to do a deal since a Chinese slowdown has far-reaching consequences for U.S. stock markets which Trump tends to reference as a sign of his competence when they are rising.
“We still believe it is more a matter of when than if we will see a trade deal. The timing is uncertain but, judging from Trump’s comments, we will have to wait another month or so for an announcement of a summit after the deal is done. One of the outstanding points is how many of the US tariffs will be lifted immediately and how many will stay on for some time,” says Allan Von Mehran, chief analyst at Danske Bank.
Chinese trade data is also likely to be the key release in the week ahead for the New Zealand Dollar. Exports fell a massive -20.7% in February as U.S. tariffs bit and although the decline was partly put down to the timing of the Lunar new year festivities, it couldn't explain the whole extent of such a big fall.
Partly as a result of the decline in February, exports in March are expected to post a recovery of 7.3% when they are released at 4.00 BST on Friday.
Imports are expected to continue to decline, although at a slower -1.3% compared to the - 5.2% of the previous month.
A stronger-than-forecast outturn in Chinese trade data could well boost the NZ Dollar ahead of the weekend we believe.
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