Pound-New Zealand Dollar Week Ahead Forecast: Resistance Stymies Near 1.93 

• GBP/NZD well supported just below 1.90
• But only limited upside once above 1.93
• U.S. CPI the highlight for global markets 

Image © Adobe Stock

The Pound to New Zealand Dollar exchange rate entered the new week on the front foot and may have scope to edge higher in the days ahead although a cluster of moving averages located around the 1.93 level could eventually frustrate Sterling's recovery.

Sterling was a beneficiary on Monday from a rally in global markets and its weakening of the U.S. Dollar, which enabled the Pound to notch up gains in relation to all G10 counterparts except the Australian and Canadian Dollars. 

New Zealand's Dollar was, meanwhile, a middle-of-road performer in price action that saw GBP/NZD bounce again off a technical support level located just below 1.90 that has so far arrested its three-month decline. 

"The market is scrambling to price in the medium term and longer implications of what has unfolded here – metals prices have jumped and the Chinese yuan has gone almost vertical against a weaker US dollar," says John Hardy, head of FX strategy at Saxo Bank.

"Elsewhere, the USD is rolling over again in places (NZDUSD) and threatening to do so (USDSEK, USDNOK), while EURUSD has yet to breach the cycle resistance," Hardy writes in a Monday market commentary.

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.

Monday's price action came amid heavy speculation in the market about what China's lifting of the last coronavirus-related restrictions on activity might mean for the world's second-largest economy as well as for the economies of key trade partners in the region of which New Zealand is one.

This and Friday's widespread selling of the U.S. Dollar has helped lift the NZD/USD pair from lows near the round number of 0.62 last week to highs around 0.64 on Monday while also delivering a boost to GBP/NZD, although both face risks emanating from the U.S. economic calendar this week.

"With little local data this week and many New Zealanders still on holiday, the focus this week will be offshore, with US CPI set to be a key determinant of how big the next Fed rate hike will be," says David Croy, a strategist at ANZ. 

"We expect a 25bp hike but markets are pricing in around 32bp; so expect ongoing volatility, especially if liquidity remains thin," he adds.

Public commentary from Federal Reserve officials and U.S. inflation figures are the highlight of the week for global markets and also potential pitfalls for Sterling and the Kiwi if it transpires that investors were too hasty when marking down expectations for U.S. interest rates last week.

Above: NZD/USD shown at weekly intervals with selected moving averages. 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.

U.S. interest rate expectations were marked down after wage growth underperformed expectations in Friday's non-farm payrolls report for December and as the Institute for Supply Management (ISM) Services PMI joined its S&P Global counterpart in warning of a recession underway.

"We're expecting Fed speakers — including JP tomorrow — to lean against froth in risk appetite, but with limited success amidst solid resistance in the FX market to sustained dollar appreciation," says Stephen Gallo, European head of FX strategy at BMO Capital Markets. 

"A surprisingly strong reading on December US inflation is needed for the current dynamic in the FX market to flip, but the BMO call for core MoM has been parked at 0.3%," Gallo writes in Monday market commentary. 

How Sterling finishes up the week is likely to depend on if economists are right in expecting U.S. inflation to have fallen from 7.1% to 6.6% last month because if they are mistaken it could potentially arrest the decline in U.S. exchange rates and dampen investor risk appetite from Thursday.

That could be supportive of GBP/NZD, which often tends to rise and fall alongside the U.S. Dollar, although this Monday's price action saw Sterling and the Kiwi trade places so a favourable impact is far from assured.