GBP/NZD Midweek Update; Breakdown to 1.84, 1.83 and 1.82 Forecast

The GBP/NZD chart looks like it is forming a rising wedge pattern on the four-hour time-frame, which has bearish implications once it has finished.

The pound had been rising strongly versus the New Zealand dollar until Tuesday’s Global Dairy Trade (GDT) auction showed a surprise 1.9% rise in Whole Milk Powder - and then it stalled.

Whole Milk Powder (WMP) is the country’s single largest export, so a rise, albeit small, supports the New Zealand dollar (kiwi).

There was a negligible change in the overall GDT Index, however, which averages the prices of a basket of dairy products, since several of the constituents such as butter fell in value.

From a technical POV the pound’s recovery rally looks like it is coming to an end.

There is a rising wedge pattern forming on the four-hour chart, which once finished will probably break lower.  

The pattern is probably half-finished now that constituent wave’s A, B and C have completed, since wedges tend to be composed of a minimum of five waves ie A,B,C,D and E.

The MACD momentum indicator in the bottom pane is diverging bearishly with the exchange rate, signalling more potential weakness on the horizon.

Rising wedges almost always break lower after they finish forming, and this wedge is expected to move down to a maximum target of 1.8200.

A break below 1.8500 would probably provide confirmation of a move lower towards 1.8200.

Possible interim targets include 1.8400 and 1.8300.

Central Banks both poised to cut interest rates

The RBNZ and the Bank of England (BOE) both look set to cut interest rates in August – moves which will weaken both currencies.

The positive employment data from the UK out today did little to dissuade economists that the BOE would go ahead with a summer stimulus programme.

Capital Economics’ Paul Hollingworth, for example, whilst noting the improvement in Wednesday’s Jobs report, still stuck to his call that the BOE would probably pull the trigger at their next MPC meeting in August:

“Despite the relatively upbeat assessment of the labour market, we still expect the MPC to follow through with its (loose) commitment to ease policy at its next meeting on 4th August. After all, the vote to leave the EU will almost certainly now cause some firms to put hiring decisions on hold or cut back headcounts altogether. Indeed, we expect the unemployment rate to begin to drift up over the coming quarters."

The RBNZ, meanwhile, is expected to go ahead with a rate cut in August after ordering an ‘interim economic assessment’ to bridge the RBNZ rate meeting statement in June and the one in August. This was seen as a move expected to pave the way for cuts in August by some market commentators.

Nevertheless, the unexpected publication of a consultation paper by the bank on the housing market bubble and ways to calm lending down -  known in jargon as macro-prudential policies did increase expectations of a rate cut.

According to CIBC capital market’s Jeremy Stretch these expectations now stand at 75% in probability terms.

A cut would lead to a depreciation in the New Zealand dollar as lower interest rates reduce the appeal of currency to foreign investors seeking yield.

“Although we have seen a slight moderation in rate expectations the implied probability remains at 75%. Expectations remain elevated in the wake of the unexpected publication of the RBNZ consultation paper on new housing market macro-prudential measures. With dairy sector headwinds being set to persist we would look to sell NZD rallies up to  0.7060/70, with short term stops placed at 0.7125.” Remarked Stretch.