GBP/NZD: Forecast, News and Data to Watch for the Week Ahead

The New Zealand Dollar lost ground last week as political risks started to dominate the exchange rate ahead of the September 23 elections and a downwards revision in government growth forecasts also weighed.

GBP/NZD rose to the 1.78s from the 1.75s during the week as the Pound gained ground - although this was more as a result of Kiwi weakness than anything else.

Another factor was, "the Reserve Bank’s unease about the currency and talk of intervention," says Kathy Lien of BK Asset management, which, "puts NZDUSD on track to test 71 and possibly even 70 cents." 

Political risk has come from uncertainty about the outcome of the election and the possibility that an anti-immigration coalition of the National and NZD First parties may gain power, leading to lower immigration and - given the economic boost that comes with immigration - a loss of growth momentum.

If the Labour party win, on the other hand, they have promised to reform the Reserve Bank of New Zealand (RBNZ) to include a mandate for achieving full employment and a board decision on rates rather than just the governor deciding, which is likely to keep policy accomodative on balance and weigh on the Kiwi.

With both the most likely outcomes potentially signaling Kiwi weakness it is no wonder the currency is in a new downtrend.  

Technical Outlook: Sideways Action

From a purely technical perspective, the recovery in GBP/NZD does little to change the broader ambiguous outlook for the pair since it has only reinforced the sideways, directionless look-and-feel of the charts.

To see a trend develop we would want to first see a breakout from the range - either higher or lower - but which is highly unlikly to develop as soon as the week ahead.

Instead, a continuation of the current mini-uptrend is probable with an upside target not much higher than the current level, at resistance at 1.7830, and after that a possible rotation back inside the range.

A move lower would likely find support at the 50-day moving average at 1.7660.

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News and Data for the New Zealand Dollar

Housing data could gain importance in the week ahead due to concerns the sector may be slowing, and this in turn may impact monetary policy and the New Zealand Dollar.

New Home Sales, out on Thursday at 2.00 BST, may well be of interest as could August QV house price data, also out on the same day.

"A further slowdown in house price growth (prior 6.4% YoY) would be a thumbs up to the RBNZ's macro-prudential policies put in place last year," said ING's Chris Turner, however, this in turn is likely to reduce the chances of interest rates rising and is therfore likely to be Kiwi-negative.

Second quarter terms of trade data is out on Thursday, which is the differenct between a basket of a country's export prices and import prices, and is expected to fall due to, "recent price dynamics in the domestic dairy markets," adds Turner.

This is backed up TD Securities, who do not think terms of trade will rise as markedly as expected:

"We see a 3% pickup in export prices (lagged boost from Q1 dairy price pickup) tempered a little by a +1% pickup in import prices. While we see import prices rising this time, we see big falls for H2 2017 given the slide in oil prices combined with the lofty exchange rate," says TD.

A lower terms of trade could also weigh on NZD, as it is signal the trade balance is likely to be lower, and reflect lessening demand for the Kiwi from trading partners buying NZD exports. 

News and Data for the Pound

It is a thin week for UK data with the only releases of any significance Consumer Confidence on Thursday 31 at 12.05 BST, and Manufacturing PMI, on Friday, September 1 at 9.30, although analysts do not see either as being market moving.

House Price data from Nationwide will also be released at 7.00 on Tuesday, August 29.

But it will be Brexit negotiations that matter for Sterling in the coming week as the EU and UK sit down for their third round of talks.

"The central bank’s ongoing concerns about Brexit, uneven data and the prospect of a stronger U.S. Dollar, kept Sterling under pressure and we believe these same factors will lead to the currency’s continued underperformance this coming week," says BK Asset's Lien.

"The last we heard, Brexit talks could be delayed until December – 2 months later than planned as disagreements have caused the government to hope for a change in the German government. Germany holds federal elections at the end of September but Angela Merkel is widely expected to win," adds Lien.

The U.K. government is sticking to its view that they should not pay a penny more than their legal obligations according to foreign minister Boris Johnson. However, Johnson has also made clear that the UK accepts it has obligations with regards to paying a settlement fee.

So this could be constructive in that the Government is showing some unity of purpose and are notably softer in rhetoric.

News that the opposition Labour party appear to be shifting to a much softer version of Brexit, however, could offset the slide in Sterling if it pressures the Government to adopt a similar stance.

Shadow minister for Brexit, Kier Starmer, has set out Labour's revised position in an Observer article this weekend, which has the potential to rattle markets. 

Labour's new position is that the UK will keep membership of the Economic and Customs union - but not the political union - during a handover period of 4 years after the official exit date in 2019, with a view to potentially retaining some aspects of membership forever, and negotiating out those which are less desirable.

With markets so negative on Sterling we believe the risks are now to the upside.

Specifically, if EU Brexit negotiator Chief Michel Barnier were to say at the conclusion of this week's negotiations that progress has been made, the Pound could pop.

The UK Government's position papers, released over recent weeks, should provide welcome clarity for negotiations. If some good progress can be made over coming days the oversold Sterling might find the fundamental trigger to a recovery.