Pound-New Zealand Dollar Recovery Forecast to Extend

- GBP/NZD adds to previous week's 2.0% gains
- Momentum turning increasingly positive
- Beware Thursday's Brexit update
- NZD hampered by threat of -ve interest rates in NZ

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• GBP/NZD spot rate at time of publication: 1.9660
• Bank transfer rates (indicative guide): 1.8977-1.9114
• Transfer specialist rates (indicative guide): 1.9400-1.9488
• More information on specialist rates here

The British Pound starts the new week on the offensive against the New Zealand Dollar as the UK currency looks to build on the 2.0% gain registered in the week prior, with momentum indicators suggesting the recent recovery can run further.

The New Zealand Dollar is meanwhile being tipped by analysts to remain under pressure amidst ongoing expectations for the introduction of negative interest rates at the Reserve Bank of New Zealand (RBNZ) in 2021.

The Pound-to-New Zealand Dollar exchange rate is trading nearly a percent higher on Monday at 1.9657 amidst a broad-based recovery in Sterling on a growing view that an EU-UK Brexit trade deal is now more likely to be agreed before year-end than not.

Since the UK voted to leave the EU in 2016 the Pound has been prone to following the pendulum between 'deal' or 'no deal' outcomes to negotiations; at the current time the pendulum is swinging back towards 'deal' following a series of reports out over the past week that both sides have acknowledge an improved atmosphere and are both confident of securing a deal.

The ninth and final round of negotiations commence in Brussels on Tuesday and are due to end on Thursday, after which a press briefing from the chief negotiators is expected and this forms the key risk for Sterling this week.

Any bad news at this time will likely send Sterling into reverse and prompt some GBP/NZD downside.

For now though near-term momentum is turning in favour of the Pound and the prospect of further gains is likely.

A key element of the GBP/NZD chart we have been watching of late is that layer of support around the 1.90 region which has in the past arrested Sterling weakness. The below monthly chart gives a decent sense of how significant this level is on a longer-term basis and confirms the GBP/NZD exchange rate is uncomfortable below here:

We wrote last week that it would likely take a substantial deterioration in sentiment towards Sterling for the 1.90 support level to break, a view that will only likely have been reinforced by Sterling's decisive bounce higher from this zone. Equally, the New Zealand Dollar would unlikely be able to muster up the kind of strength required to breach 1.90 in the current environment that sees markets expecting negative interest rates at the RBNZ in 2021.

Looking beyond the 1.90 support, the daily charts are showing momentum has swung from negative to positive and now advocates for further GBP/NZD gains.

The Relative Strength Indicator (RSI) - a gauge of momentum showing the lower pane in the below - has now risen to 57 and is positively configured.

The other development to watch is an impending break in the exchange rate above the 50 day Moving Average (blue line in the above), which technical advocates say is a bullish occurrence that tends to be followed by further gains while lowering the likelihood of a renewed impulse lower.

A break above the 50 day MA by the GBP/NZD would be an emulation of the break above the 50 day MA in the GBP/AUD, which occurred on Thursday last week and has indeed been followed by subsequent moves higher.

The positive setup in GBP/NZD not only reflects an improved sentiment towards Sterling, but also the lacklustre appetite for New Zealand Dollars on the international foreign exchange market.

Foreign exchange strategists at Barclays say this week they remain bearish on the New Zealand Dollar, and that "risks of further losses have climbed in the medium term, especially after the RBNZ signalled readiness to ease more."

The RBNZ last week left policy settings unchanged but struck a decidedly dovish tone that contributed to New Zealand Dollar weakness.

Governor Adrian Orr and his team kept alive the prospect of negative interest rates being introduced in 2021 by indicating a Funding for Lending Programme (FLP) would soon be introduced with the aim of shoring up banks in a negative interest rate environment.

Economists are largely in agreement that the RBNZ will lower interest rates to 0% or below in early 2021. Barclays now expect the RBNZ to lower the OCR to -25bp by April 2020.

New Zealand Dollar strength is likely to remain limited as long as the prospect of lower interest rates - and therefore lower bond yields - in New Zealand remains on the horizon.