GBP/NZD Outlook for the Coming Week
The Pound to New Zealand Dollar exchange rate has popped higher at the start of the new week and is quoted at 1.7326 having closed the previous week at 1.7256.
The NZ Dollar is lower across the board amidst a broad-based stock market sell-off. "Concerns on protectionism appear to be rising after President Trump’s executive order to restrict immigration over the weekend," says analyst Adam Cole at RBC Capital Markets.
These are conditions that tend to work against the high-yielding New Zealand Dollar which tends to rally in tandem with commodity prices and stock markets.
The move higher in GBP/NZD comes against our bearish expectations for the pair this week.
Our technical studies hold a negative bias having seen the exchange rate break below the trendline from the mid-January lows:
From here the pair is expected to follow-through to the downside, with a move below the 1.7234 lows leading to a continuation down to the next target at 1.7180 calculated by extrapolating the height of the move prior to the trendline down from the break.
Recent New Zealand inflation data surprised to the upside lifting the New Zealand Dollar.
This has resulted in the relatively greater weakness in GBP/NZD compared to other Sterling-based pairs.
Investors will be gauging the importance of data in the week ahead based on how they think it will impact on interest rate expectations, which are currently orientated to expecting a rise in rates and therefore supportive of the Kiwi.
Watch employment and earnings data on Tuesday, due for release at 21.45 GMT.
It is likely the focus will not so much be on the actual unemployment rate which is skewed by a rapidly rising population and participation in the labour market, but on wages, which are a better determinant of inflation pressures.
“Strong employment and tight capacity is not news. Rather, all eyes on wages, looking for a pop to justify the market’s inflated appetite for a hike,” say TD Securities in a research note to clients.
Markets are expecting the employment rate to increase by 0.8% while the quarterly labour cost index is forecast to rise 0.5%.
The Pound: All Eyes on Bank of England Meeting and Inflation Report
The Pound could be the currency to supply the fireworks this week, with Thursday highlighted due to the BOE meeting and the release of the Quarterly Inflation Report.
There is potential for the Sterling to strengthen as recent above-forecast growth means the BOE will probably revise up their growth forecasts.
Of interest however will be whether forecasts to the inflation profile are moved higher.
The strong consumption and stubbornly low unemployment means the BOE has more room to tackle rising inflation caused by the weak Pound and rising oil price.
This, in turn, could lead to heightened expectations of a BOE rate hike and a change of stance from neutral to more hawkish, which would propel Sterling higher.
“We like buying pounds into the Quarterly Inflation Report, especially as it dips toward 1.25 with a target of 1.27/1.28,” says BK Asset Management’s Kathy Lien.
However, Sterling remains a political currency and we expect major moves to be framed by the Brexit story.
“It's strange to see GBP performing so well when the path towards a 'hard' Brexit remains firmly on the table; strategically, we remain bearish on GBP/USD and look for fresh catalysts (namely dollar strength) to see a short-term move back towards the 1.24 level,” says ING’s FX strategist Viraj Patel.
Also watch UK PMI data this week with manufacturing, construction and services PMI’s being released on Wednesday, Thursday and Friday respectively.
Manufacturing is expected to pull-back a basis point to 56.0, Construction forecast to 53.8 from 54.2 and Services to 55.8 from 56.2.
