GBP/NZD Rate Week Ahead Forecast: Pulling Back, But Uptrend Still Intact

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The Pound to New Zealand Dollar exchange rate remains in a broad multi-month uptrend but short-term is subject to a pullback.

Having hit a new seven-year high at 2.1586 on August 21 the pair has retreated in a move that serves to rebalance a market that was looking extended following a rapid ascent through early August.

Studies show that the Pound-New Zealand Dollar rate (GBPNZD) nevertheless remains above key moving averages which confirms momentum remains locked to the upside and further advances can ultimately be expected.

Above: GBPNZD at daily intervals.

The above shows the exchange rate remains well above the 50-day moving average, but we can see from past price action that pullbacks can retreat to this trendline.

The market is still some way from such an occurrence and we would therefore give some room to allow the pullback to extend further.

Should the pair retreat back to the 50-day moving average, currently at 2.0950, we would put the market on watch for a break of trend and would warn that an end to Pound Sterling outperformance would be at hand on any successful downside break.

A period of retracement and consolidation can therefore be expected to extend over the short-term but an upside stance is still preferred.

"There is a challenging backdrop for the AUD (and also the NZD) given maturing hiking cycles, a lack of clear carry advantage versus peers compared with the historical norm, and China's economic woes," says Themistoklis Fiotakis, a currency analyst at Barclays.

Looking at fundamental drivers for the week ahead, there is very little on the UK and New Zealand economic calendars this week, suggesting limited scope for any domestic triggers.

Of some interest, however, will be Wednesday's appearance of the Bank of England's Monetary Policy Committee (MPC) members before Parliament's Treasury Select Committee where they will be grilled on the latest developments concerning UK inflation and interest rates.

"Governor Bailey, Cunliffe, and Dhingra will testify to the Treasury Select Committee following the publication of the Aug MPR. While Dhingra will most likely stick to her dovish comments, it could be interesting to hear from Bailey and Cunliffe. We will in particular look for comments about how continued sharp upside surprises in wage growth might shape policy moving forward," says a note from TD Securities.

In keeping with Bank of England Chief Economist Huw Pill's latest comments, expect MPC members to indicate that inflation remains worryingly elevated to prompt further rate hikes, bolstering market expectations for another 25 basis point hike this September.

But at the same time, MPC members will tell parliamentarians that recent softer inflation data has been encouraging and this should ensure market pricing for a further hike in November remains less certain.

The MPC is therefore unlikely to stray from a script that offers any lasting moves in GBPNZD and any short-term moves should be acted on by those looking for any short-term tactical advantage.