Pound-to-New-Zealand-Dollar Rate 5 Day Forecast: Losses Ahead after Double Top Forms on Daily Chart

- GBP/NZD forms a bearish reversal pattern on charts.

- Possible move down to 1.9080 subject to confirmation.

- Brexit in focus for GBP, employment data for the NZD.

© Filipe Frazao, Adobe Stock

The Pound-to-New-Zealand-Dollar rate is trading around 1.9276 at the start of the new trading week and may see a move lower to over the coming days, given a bearish pattern forming on the charts.

GBP/NZD continues to look vulnerable to losses following the formation of a bearish technical chart pattern called a double top, which looks like the letter 'M' and often forms at market tops. This indicates further weakness in the short-term.

A necessary condition for the pattern to 'trigger' more selling, is for the bottom of the pattern, also known as the 'neckline', to be broken.

In the case of GBP/NZD, the neckline has already been broken and the pair is now expected to fall to a conservative downside target of 1.9080.

Above: Pound-to-New-Zealand-Dollar rate shown at daily intervals.

Since the break, however, the pair has recovered temporarily. It has now risen back to the level of the neckline briefly in what is known as a 'throwback' move. Throwbacks are usually only temporary - a sort of pause - before the resumption of the downtrend.

A break below the 1.9197 lows would probably provide the confirmation necessary for expecting a continuation down to the 1.9080 target.

On the weekly chart, the pair appears to be forming a protracted sideways range that looks like a triangle pattern, which are usually composed of a minimum of five waves. This one has already formed four waves and is currently forming the fifth wave-e.

Above: Pound-to-New-Zealand-Dollar rate at weekly intervals.

Once 'e' is complete, the chances of a breakout to the upside will increase given the bullish rally prior the formation of the triangle. Ideally, we would want to see a break above 2.0000 for confirmation of a breakout higher.

The high bar for confirmation is due to the location of the 200-day moving average 1.9775, which needs to be cleared first before expecting further upside.

Large moving averages like the 200-day are often obstacles to prices, thus we would like to be sure of a clear break above the 200 before expecting higher prices.

Confirmation would lead to a likely rally to a target at 2.0430, calculated from the height of the triangle at its widest point and multiplied by the golden ratio of 0.618. This is the usual method used by analysts to establish targets from pattern breakouts.

The New Zealand Dollar has risen as a result of higher inflation expectations, which have increased the probability that the central bank will raise interest rates some time soon. Higher interest rates are bullish for a currency given their influence over international capital.

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What's on the Calendar for the New Zealand Dollar this Week?

The main release for the New Zealand Dollar rate (Kiwi) in the week ahead is Employment data out at 22.45 GMT on Wednesday, July 24.

Change in employment is forecast to show a 0.4% rise in Q2 from 0.6% in the previous quarter. The Unemployment rate is expected to rise to 4.5% from 4.4% previously.

Better-than-expected employment data is usually bullish for a currency as it shows a healthy economy which is likely to draw more overseas investment and because it is likely to lead to higher inflation and interest rates, and these are also often bullish for the currency.

The other main release for the Kiwi is the trade balance in June, which is forecast to show a surplus of 200m from 294m in the previous month.

A higher-than-expected surplus can be bullish for a currency as it is indicative of strong export growth which is both positive for the economy and also increases direct demand from trading partners for the currency in order to purchase the exports.

What's on the Calendar for the Pound this Week?

The bearish prognosis painted thus far is based on our technical studies which aim to cut out the noise posed by economic data, politics etc.

Of course, the picture is significantly more complicated than this and in our opinion there could be some relief for the Pound as market focus shifts to 1) Bank of England interest rate pricing and 2) thinning Brexit-related headlines.

The week ahead for UK data kicks off on Monday with a speech from Deputy Governor of the Bank of England Ben Broadbent to the Society of Professional Economists in London at 18:00 GMT.

Analysts will be listening out for any comments in relation to Broadbent's stance on hiking rates in August. Current probabilities favour a hike from 0.25% to 0.75%.

The Confederation of British Industry (CBI) Industrial Trends Survey is released at 11.00 GMT on Tuesday, July 24, and is forecast to come out at 10 from 13 previously.

The result is the balance between positive and negative survey answers. Data from the CBI often gives a timely indication of economic trends and is closely watched by the market.

Mortgage Approvals are due for release on Wednesday at 9.30 and forecast to show a rise of 39k in June from 39.4k in the previous month of May.

Friday sees the release of Nationwide Housing Prices in July, which are expected to show a 0.5% rise from June and a 2.0% rise since July 2017.

The other main driver of the Pound in the week ahead will be the ongoing debate over Brexit.

Sterling weakened last week as fears resurfaced of a hard Brexit following Brussels's mixed response to Theresa May's Chequer's proposal, which itself was a hard-won compromise.

EU Chief negotiator, Michel Barnier was overall positive about the plan which he said had elements that were "very useful" however he was concerned it undermined the "integrity of the European Union" as a free trade region.

The reaction was seen by many as a sign the EU would want further compromises.

Given the negative response from many Brexiteers over the current proposals, further compromises are seen as unrealistic, hence markets starting to price in a 'no deal' Brexit which is ultimately reflected in a weaker Pound.

Barnier's most recent comments on the nature of the border with Ireland did show some signs the EU was willing to be flexible on its previous backstop solution.

The EU's backstop has been seen as unacceptable to Ulster Unionists, Theresa May's allies in parliament, who demand Northern Ireland and the rest of the UK remain intact after Brexit, and to the wider Conservative party.

There was something of a breakthrough on Friday following the EU General Affairs Council meeting when Barnier said the EU was in fact willing to search for a compromise on the question of the Irish border and revise its backstop.

A possibility of a no-deal has weighed on the Pound since the referendum and risks pushing the currency even lower in the week ahead. Likewise, relief is possible too, especially if Theresa May's proposal gains favour in Brussels.

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