GBP/NZD: 2.20 Before 2.40

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The Pound to New Zealand Dollar exchange rate (GBP/NZD) could be on course to test 2.20 as last week's snap-back opens the door to softer near-term trading conditions.

GBP/NZD fell an impressive 1.08% last Thursday amidst a broad liquidation in GBP exposure that came without warning or explanation.

The result is a softer technical setup in many GBP exchange rates, including GBP/NZD, which opens the door to further weakness in the coming days.

GBP/NZD is now below the 9-day exponential moving average (EMA), which is also pointing lower, confirming a softer setup in the immediate term (coming hours and days).

Typical GBP/NZD rallies are usually followed by pullback / consolidation episodes that can last for about one to two months, and there is a strong chance the exchange rate has entered one such phase.

This would imply that 2.20 comes before a retest of 2.40, which markets the highest levels in GBP/NZD since 2015.

Note, however, that the multi-year uptrend remains intact and it would take a significant deterioration before we call an end. The idea is that the current pullback / consolidation ultimately yields to another impulse higher to fresh multi-year highs later in Q1.

Keep in mind that this month sees the U.S. Presidential Inauguration (Jan. 20), which is almost surely to be followed by pronouncements that could shake global markets.

The prospect for volatility is high, but the trend since Trump's November victory has been one of NZD weakness and GBP/NZD gains. Should this theme be rejuvenated by the changeover at the White House, then the pullback we are anticipating in GBP/NZD might prove shallower than would otherwise have been expected.

There is little on the data docket in New Zealand and the UK this week. Thursday's Chinese inflation numbers will potentially be big news for NZD, as this should show how New Zealand's most important export market is performing. Should inflation beat expectations of 0.1% y/y growth, China-focused assets like AUD and NZD can rise.

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Rising inflation would be consistent with improvements in underlying demand and activity, which might suggest the efforts by Chinese authorities to bolster the economy are paying off.

Friday's U.S. non-farm payroll report will be an important driver of global FX sentiment. This marquee data release could bolster the Kiwi Dollar if it undershoots expectations.

Analysts expect U.S. job gains to have remained elevated in December at 180k, registering only a modest slowdown from a 227k print in November.

U.S. data has been outperforming expectations since October and the bar really is quite high for upside surprises. This leaves increased scope for the bigger market reactions to follow underwhelming data. In these scenarios, even on-target data can result in disappointment.

This could leave USD at risk of a setback as any disappointment would bolster bets that the Federal Reserve can cut rates on more than one occasion this year.

This would boost the NZ Dollar across the board, in turn pressuring GBP/NZD into mid-month.