Outlook for Pound-to-New Zealand Dollar Rate: Downtrend Expected to Continue
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- GBP/NZD’s sharp downturn forecast to extend
- Momentum is oversold, however
- New Zealand Dollar to be impacted by CPI data
The GBP/NZD exchange rate is trading at around 1.8672 on Monday, already down almost half a percent this week so far, and studies of the charts suggest that the exchange rate is likely to continue declining over the next week but a busy week of key data releases for both currencies could provide heightened volatiltiy.
The New Zealand Dollar was an outperformer at the start of the new week after Chinese economic data beat expectations, ensuring the currency registered advances against all its major G10 counterparts.
The 0.90% advance against Sterling takes 2019's gain to 2.0%.
"The GBP/NZD has been trending lower since early May, mainly because of Brexit uncertainty weighing on the UK economy and the Pound. Meanwhile, the New Zealand dollar has found some support as the Reserve Bank of New Zealand decided against cutting interest rates at its most recent meeting," says Fawad Razaqzada, an analyst with Forex.com. "This week could be even more important for the GBP/NZD, with both currencies likely to move sharply in response to fresh top tier data from New Zealand and the UK."
Looking at the technical forecast, we note the 4-hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows the pair in a steep decline and since the ‘trend is your friend’ according to the old adage it will probably continue rather than reverse.
The RSI momentum indicator is the only fly in the ointment for bears. It has now just entered oversold territory (circled) and this increases the risks of a pull-back evolving.
Overall, however, it is not enough to suggest a reversal of the dominant downtrend which we see extending all the way down to the 1.8385 December 2018 lows, subject to a confirmatory break below the 1.8650 level.
The daily chart shows the pair is steep decline since the beginning of May, and this established downtrend is expected to extend over the medium-term - the time frame covered by the daily chart - which includes the next week to month ahead.
Again, the only slight concern here is the RSI momentum indicator in the lower pane, which is in the oversold zone below 30. If you look at how the exchange rate pulled back on the two previous occasions the RSI entered oversold territory it gives you an idea of what might happen this time.
Yet, notwithstanding the pullback, the pair will probably extend lower and a break below the 1.8650 and then the 1.8619 levels would provide added confirmation of a bear extension lower.
The next downside target is the December 18 lows at 1.8385, possibly followed by the 2018 lows at 1.8125 if the downtrend keeps going.
The weekly chart shows pair forming a bearish measured move or ABCD pattern. This suggests an extension of the downtrend down to a target based on the proportions of the pattern.
The length of a-b can be used to forecast the length of c-d. In this case, it suggests an end target for c-d of around 1.7650.
The weekly chart is used to give an idea of the longer-term outlook, which includes the next few months.
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The New Zealand Dollar: What to Watch this Week
The New Zealand Dollar is mainly driven by global risk trends and Chinese data because of the two countries close trading relationship.
As such, Chinese GDP data, out early on Monday morning, was probably the highlight of the week for the Kiwi. In the end, the data was slightly better than expected, with quarterly growth at 1.6% when analysts had expected only a 1.5% rise and yearly at 6.2% as forecast.
The real surprise was industrial production, which came out at 6.3% in June when forecasts had only been for a 5.2% rise.
The data suggest that whilst the trade war has hit China it has not dealt it a ‘body blow’, and as a result currencies like the New Zealand Dollar which rely on trade with China rallied on Monday.
Domestic data has also been marginally better-than-expected, further supporting the Kiwi, with NZ Manufacturing PMI for June holding up pretty well compared to many other countries after it came out at 51.3 from 50.4 previously.
The Rienz house price index for June showed a slowdown in its otherwise deep decline after falling -3.8% compared to -7.8% previously.
All the evidence above suggests economic headwinds are not as bad as expected and that there is even less chance the Reserve Bank of New Zealand will cut rates any lower for the time being.
Since currencies tend to rise and fall in tandem with interest rates this is providing support for the Kiwi.
As far as data goes the main release on the horizon is inflation which is forecast to rise by 1.7% in Q2 when it is released at 23.45 on Monday (tonight).
This would represent a decent rebound from the 1.5% previous result in Q1 and further reduce the probability of a RBNZ rate cut.
A lower than expected result might weigh on the Kiwi, however, by reintroducing the possibility of a rate cut again.
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