Pound to New Zealand Dollar Week Ahead Forecast: Breakout Coming
- Written by: Gary Howes
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Image © Adobe Images
The Pound to New Zealand Dollar exchange rate (GBP/NZD) is akin to a coiled spring, with a risk the breakout move could be to the downside.
The New Zealand Dollar is one of the better-performing currencies at the time of writing on Monday.
In fact, this outperformance is evident across the span of the last week, with only the Pound and Yen making a gain against it.
But the Pound has also outperformed, and a look at the GBP/NZD chart reveals two currencies that are struggling to gain the upper hand.
The exchange rate is therefore consolidating ahead of a potential move in either direction:
The pair is coiling between a graphical horizontal level at 2.1450; a level it has not closed below since October 14, and the 21-day moving average at 2.1557.
There is a heavy feel to the chart, which raises the prospect of any resolution of the current constriction being to the downside.
We think a factor behind the recent NZ Dollar outperformance is the already heavy central bank discount that is nearing its limits.
The NZD has been weighed by the Reserve Bank of New Zealand's preference to cut rates hard and fast, but, with these 'dovish' expectations close to maxing out, the NZD can find itself less prone to this narrative.
Any sense that the NZ rate cut expectations were to reverse would in turn boost the NZD.
A midweek speech from RBNZ Governor Adrian Orr could be helpful to the currency in this regard.
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Orr's speech comes days after the RBNZ cut rates again by 50 basis points and he will be expected to shed more light on where rates will be heading in the coming months.
The NZD rallied on the day of the cut as markets got little indication the RBNZ would accelerate the pace it cut rates, or cut below the floor the market anticipates.
This speaks to the idea that the NZD is less vulnerable to already 'dovish' central bank expectations.
Last week, we reported that ANZ Bank thinks NZD can appreciate into year-end and extend gains into 2025 and 2026.
"If our forecasts are to be achieved, clearly the Kiwi has to pull an impressive trick out of the proverbial bag given where it is now," says David Croy, a currency analyst at ANZ.
According to Croy, the NZD has three things in its corner: gravitational pull to fair value (which it sees at around 0.62), seasonality, and higher dairy prices.
"Seasonality is something a lot of market participants look at, because as the name implies, it tends to have consistency behind it. In the Kiwi's case, seasonal positives include summer tourism and agricultural output (much of which is exported), and it tends to be positive in December," explains Croy.
Higher dairy prices are also a potential source of support, as they could boost New Zealand's foreign exchange earnings.
