Pound / New Zealand Dollar Rate Touches Top of the Range, Positions for Breakout

Image © moonrise, Adobe Stock

- GBP/NZD sitting at roof of long-term trading range

- Poised to break higher but tough resistance in way

- Potential for game-changing news to push exchange rate out of range and higher

The Pound-to-New Zealand Dollar exchange rate has risen to touch the ceiling of the narrow range it has been oscillating in since December last year, and is now threatening to breakout higher.

The pair has risen due to a combination of a strengthening Pound and weakening New Zealand Dollar.

Sterling strengthened after reports both the UK and EU negotiating teams had relaxed their stances on agreeing a Brexit deal; and the Kiwi weakened as markets braced for a potential escalation in the China-US trade war as the US mulls imposing tariffs on a further $200bn of Chinese imports.

Further announcements in relation to both these issues could generate a volatile breakout.

GBP/NZD is now perfectly placed to breakout higher if there is further positive news for the Pound or negative for the Kiwi, with a potential upside target well above the key 2.00 level, at 2.0400 potentially on the cards.

The pair has also touched the formidable 200-week moving average (MA) located just above the range ceiling at 1.9735. Although it pulled back sharply after touching the MA, this is quite a normal reaction and does not necessarily mean the exchange rate will not eventually break higher.

The sideways market since the beginning of the year looks very much like a triangle pattern which is now probably complete.

Triangles must have a minimum of five constituent waves to qualify and this triangle now has six. This increases the chance of a breakout.

The odds are slightly biased towards expecting a breakout higher for two reasons.

The first is because the trend prior to the pattern was up, and trends usually extend.

The second is that the triangle's component waves are slightly stronger on the way up than on the way down which is also a bullish sign.

Given the Pound's volatility from Brexit news and the New Zealand Dollar's sensitivity to China-US tariff news the pair may be positioning for a breakout higher.

The formidable resistance barrier posed by the 200-week MA and the upper border of the triangle, however, means we would definitely want to see confirmation of a break from a move above 1.9850 before giving the green light to a breakout higher; nevertheless, such a break would probably reach as high as 2.0400.

This target is based on the generally accepted method of forecasting moves following breakouts by taking the height of the pattern at its widest and extrapolating the result higher from the point of exit by a ratio of 0.618.

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