GBP/NZD Week Ahead Forecast: Buoyant but also Overvalued
- Written by: James Skinner
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- GBP/NZD bounces into 2023 but potentially at overvalued levels
- CPI & cash rate differentials suggest 1.8382 to 1.8896 fair value
- USD strength & NZD/USD undervaluation supporting GBP/NZD
- Short-term fair value for NZD/USD is potentially up above 0.68
- USD trend & U.S. data key for GBP/NZD & NZD/USD this week
Image © Adobe Stock
The Pound to New Zealand Dollar exchange rate opened the New Year with strong gains but could struggle to advance much further in the days ahead and may be at risk of losses over the coming weeks as current inflation and interest rate differentials suggest 'fair value' is between 1.8382 and 1.8896.
New Zealand's Dollar fell heavily against many major counterparts at the opening of a holiday-shortened week on Tuesday as commodity-linked currencies underperformed typically 'lower beta' peers in what was a buoyant market for stocks and bonds globally.
"We do think, however, that short-term gains will give way to longer term losses over the balance of the year as a strong start to the year will give dollar bears an opportunity to reset or add to strategic short positions in the weeks ahead," warns Shaun Osborne, chief FX strategist at Scotiabank.
"Elsewhere in the major currency space, however, it is more a case of sizeable intraday losses (of more than 1.5% for the likes of the AUD and NZD despite a positive-looking risk backdrop with stocks and bonds firmer)," Osborne writes in a Tuesday market commentary.
Tuesday's losses for the Kiwi and more resilient performance from Sterling helped lift GBP/NZD back above 1.92 in its strongest intraday gain since early November but the author's model suggests the current rally could lose steam somewhere between 1.93 and 1.94.
Above: Pound to New Zealand Dollar rate shown at daily intervals with Fibonacci retracements of September recovery indicating possible technical support levels for Sterling while selected moving averages denote prospective resistance.
Meanwhile, discounting January 2022's starting GBP/NZD exchange rate of 1.9735 by the latest inflation and interest rate differentials suggests the Pound to Kiwi rate is currently expensive and that a more 'fair value' price range would span the gap between 1.8382 and 1.8896.
That overvaluation for Sterling is limited, however, when compared with the degree of undervaluation in NZD/USD as the same process suggests the latter exchange rate would be more appropriately priced up around the 0.68 level.
All of this implies lingering downside risks for Sterling in the weeks ahead, although much of the price action this week is likely to reflect investors' responses to a flurry of important U.S. economic data due out in what will be a quiet period for the UK and Kiwi calendars.
"Following the hawkish surprises from the Fed and especially the ECB in December, the focus this week will be on the US Non-farm payrolls and ISMs as well as the Eurozone HICP data for December," says Valentin Marinov, head of FX research at Credit Agricole CIB.
"In the US, investors will look for conclusive evidence that the slowdown of the US economy has started to cool down the labour market and thus brought forward the peak of the Fed tightening cycle," Marinov adds.
Above: NZD/USD shown at daily intervals alongside GBP/USD. Click image for closer inspection. If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.
