GBP/NZD Forecast: A Technical Reversal in GBP's Favour

The Pound is looking strong against the New Zealand Dollar at the start of the new week with GBP/NZD jumping to 1.7303 from its previous close of 1.7238.

The previous week saw an impressive recovery bounce across the British Pound complex and this has resulted in GBP/NZD looking to establish a technical reversal from down to up.

The MACD has also pushed above the zero-line which indicates a reversal in the trend.

The pair has formed what appears to be an almost complete Elliot Wave; Elliot Waves are made up of cycles of five waves higher and three waves back.

So far, the exchange rate appears to have completed four waves higher and may be beginning the fifth wave up.

Thus, we remain cautiously bullish and a break above the 1.7310 level would probably signal a continuation higher to the significant round-number at 1.7400, albeit with the proviso that there is a risk of a three-wave corrective sequence developing which could pull the exchange range back down – probably to long-term support at 1.7100.

Data for the New Zealand Dollar

The main release for the New Zealand Dollar is fourth quarter CPI, which is expected to show a 0.3% rise quarter-on-quarter, when it is released at 21.45 GMT on Wednesday, January 25, and a 1.2% rise year-on-year.

A beat on expectations in inflation would typically be positive for the NZ Dollar as it suggests the Reserve Bank of New Zealand doesn't have too much space within which to manoeuvre before having to raise interest rates.

And higher interest rates = a higher exchange rate.

Analysts at Westpac expect a 0.2% rise in the Consumer Price Index in Q4 2016. This would lift annual inflation to 1.2%, bringing it back within the RBNZ’s target range for the first time in more than two years.

"A rebound in fuel prices accounts for most of the rise in the annual rate. Setting this aside, inflation has been gradually picking up from its lows over the past year. The RBNZ will take some comfort from a return to the 1-3% target band. But the renewed strength of the New Zealand dollar means that inflation will remain subdued for some time yet," says a note from Westpac to clients ahead of the new week.

The Pound this Week

The Supreme Court Ruling on Article 50 will be released on Tuesday at 09:30 GMT.

Since Prime Minister May has already said she will be opening up Brexit to a parliamentary vote, the decision will only have a limited impact.

There is, however, a risk that the law lords could say the devolved parliaments of the other parts of the United Kingdom – Scotland, Wales and Northern Ireland - may also be allowed a vote, which could delay the whole Brexit process.

It is therefore possible that devolved parliaments might vote against triggering Article 50 as an expression of their opposition to Brexit.

“If the Scottish and Northern Irish devolved parliaments are entitled to vote on the matter, this could delay Brexit further. In addition, it is possible that local politicians could vote to reject the proposal on behalf of their constituents,” said Siobhan Fenton, writing for the Independent.

This will introduce a fresh layer of uncertainty for the UK and we believe it would actually be negative for the Pound which runs counter to the currency's reaction when the initial rulings on Article 50 were made by the High Court in 2016.

The big data release next week will be Q4 GDP revisions, out at 9.30 GMT, which is expected to show growth of 2.1% year-on-year (yoy) and 0.5% month-on-month (mom).

“Our economists are looking for 0.5%q/q, as a robust contribution from the service sector is expected once again. Survey indicators remain healthy, suggesting that some of that momentum is carrying in to 2017. Consensus is now looking for a shallower and longer hit to UK activity as a result of EU exit,” says Ryan Djajasaputra at Investec.