Pound / New Zealand Dollar Forecast: Risk of Slippage to 1.9950
- Written by: James Skinner
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- GBP/NZD upside limited in short-term
- But supported at 1.9950 on weakness
- Could rise to 2.02+ on a USD rebound
- GBP eyes UK CPI as NZD looks to USD
Image © Adobe Stock
The Pound to New Zealand Dollar rate entered the new week in retreat from near August 2020 highs and could be at risk of slipping back to a nearby technical support around 1.9950, unless a looming deluge of UK economic data can provide Sterling with inspiration for a renewed advance.
GBP/NZD entered the week around 2.0100 and close to 18-month highs but it wasn’t long before a more buoyant Kiwi forced the exchange rate to cede some of the ground it had previously gained amid last Friday’s recovery by the U.S. Dollar.
Friday’s rebound by the Greenback had weighed more heavily on the Kiwi than Sterling and whether it remains in recovery mode this week is likely to be an important factor determining how both NZD/USD and GBP/NZD fare throughout the period.
“Support around 0.6800 looks vulnerable this week. The past month has seen NZD/USD bounce 2 cents from 0.67 to 0.69, albeit in an unconvincing manner suggesting it’s a corrective move,” says Imre Speizer, head of NZ strategy at Westpac.
“Our medium-term outlook remains intact, namely that NZD/USD should weaken further, with potential to reach 0.6600 during the months ahead, weighed down by a stronger US dollar as the Fed’s stance tightens,” Speizer wrote in a Monday research briefing.
New Zealand’s Dollar would typically be more sensitive to any strong or sustained recovery by the U.S. Dollar, making this a potentially supportive influence for GBP/NZD if the greenback’s rebound from last week’s sell-off extends further and weighs on NZD/USD over the coming days.
Above: GBP/NZD shown at hourly intervals alongside NZD/USD.
- GBP/NZD reference rates at publication:
Spot: 2.0079 - High street bank rates (indicative band): 1.9380-1.9520
- Payment specialist rates (indicative band): 1.9900-1.9985
- Find out about specialist rates, here
- Set up an exchange rate alert, here
“NZD/USD will remain driven by USD direction this week while the local economic data flow remains relatively light. The Q4 Quarterly Survey of Business Opinion is the key release (Tuesday),” says Joseph Capurso, head of international economics at Commonwealth Bank of Australia.
“We don’t expect NZD to re‑test its December low of 0.6702 unless there is another virus related shock. We have a bullish outlook for NZD over 2022. We expect a softer USD will help to propel NZD towards 0.7500 by the end of the year,” Capurso and colleagues said in a research note this week.
U.S. Dollars had been sold widely throughout much of last week in price action that followed data revealing that U.S. inflation reached another multi-decade high in December.
They were also sold in the wake of Congressional testimony from Federal Reserve Chairman Jerome Powell that appeared to confirm the Fed is likely to begin raising its interest rate from its current crisis-inspired and near-zero level this March.
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Many analysts viewed those declines as likely reflecting profit-taking on earlier wagers in favour of the U.S. currency, which lifted the main Kiwi exchange rate NZD/USD and pulled GBP/NZD back beneath 2.00 in the process.
GBP/NZD tends to closely reflect the relative performance of GBP/USD and NZD/USD, hence why there often appears to be a negative correlation between the latter and GBP/NZD.
“The Kiwi succumbed to a rebound in the USD on Friday night. While the move coincided with a sharp snap higher in US bond yields, it also followed a string of softer US data releases, and that makes it look more like an end-of-week position-squaring move, rather than anything more significant. That said, the Fed does meet next week, and they are likely to hint strongly at a March lift-off,” says David Croy, a strategist at ANZ.
“That could jolt the USD back into its 2021 uptrend (and weigh on risk appetite, which the NZD can be thrown around by),” Croy also said on Monday.
Above: GBP/NZD at daily intervals with Fibonacci retracements of December rally indicating likely areas of technical support.
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Last week’s price action saw GBP/NZD testing the 23.6% Fibonacci retracement of its December rally located at 1.9953, which could continue to support Sterling this week in the event that further U.S. Dollar weakness inspires another recovery attempt by NZD/USD.
The risk is that last week’s sell-off proves to have been a 'flash in the pan' that leaves the U.S. Dollar to find its feet again over the coming days, which would potentially see GBP/NZD attempting to lift further above the 2.00 handle.
“NZD/GBP price action mimicked NZD/EUR and we are back below 0.50 again. Technically, a pop below the Jan 12 0.4965 low [above the GBP/NZD peak at 2.0140] could spell trouble,” warns ANZ’s Croy.
The Pound to New Zealand Dollar could potentially rise above 2.02 over the coming days or weeks if for any reason NZD/USD slips back toward its late December low near 0.6700, although in the absence of this kind of a decline any upside seen by GBP/NZD would likely be very limited.
While the U.S. Dollar and its impact on the Kiwi will be an important influence on price action during the week ahead, Sterling will also be sensitive to the outcome of Wednesday’s inflation figures from the UK and these would be an upside risk for GBP/NZD if they happen to lift GBP/USD.
“GBP/USD risks moving moderately higher this week if the December CPI is stronger than expected (Wednesday). Interest rate markets are currently pricing an 80%+ chance of a 25bp rate hike by the Bank of England (BoE) on 3 February. A quicker pace of inflation could see pricing move closer to 100%,” says Commonwealth Bank of Australia’s Capurso.
Above: NZD/USD shown at daily intervals alongside GBP/USD.
