A break above the 2.1493 highs in GBP to NZD conversion would confirm the pair's maturing uptrend but until such an event transpires expect resistance to furher gains to become increasingly entrenched.
The pound has been in the ascendency against the New Zealand dollar since bouncing off a multi-month low at 2.04 on the 19th of April.
I believe the recovery has not developed sufficiently to suggest it has long-term potential yet, so there is still a possibility of the down-trend resuming and pushing the exchange rate back below the 2.03 April lows.
I would turn more bullish should a break above the 2.1493 highs occur as this would be a major bullish medium-term signal.
The correction from the 2.03 April lows has formed three waves in an ABC pattern but last week fell back down.
For the correction to be deemed the start of a new trend higher the market would have to break above the 2.1493 highs, otherwise there is still a risk it could recapitulate.
We are also seeing the GBP/NZD being capped by the 100 day moving average on the charts; it is a notable feature for many sterling pairs at present.
We wrote earlier that the GBP/EUR has been unable to break this resistance point since October 2015 whith the April recover in this pair being rejected at the 100 day MA. Could this be the case for the GBP/NZD this May?
Should the pair break above the layered sell orders set by the market at the moving average then the prospect of a hefty rally becomes likely as the market will unlikely offer up much resistance.
However, it will take a notable fundamental trigger to prompt such a break, and we don't see such an event being available until the June 23rd referendum on the UK's EU membership.
New Zealand Dollar Still Supported by Economy
We have seen analysts at BNZ upgrade their forecasts for the New Zealand dollar this week confirming that while the currency is likely to fall, the declines will not be as deep as previously anticipated.
The NZD remains supported by the relatively high interest rates in New Zealand, which stand at 2.25%, which is much higher than most of the G10, including the UK’s 0.50% or the Eurozone’s 0.00%.
These high interest rates attract a lot of foreign investors who park their money in New Zealand to gain from the higher interest rates, this increases demand for the kiwi.
The economy is reasonably strong except for the large dairy sector which has seen its revenue collapse due to plummeting global dairy prices. RBNZ governor Wheeler went so far as to mention this in a recent speech.
Traditionally low dairy prices have prompted the RBNZ to devalue the kiwi via the vehicle of reducing interest rates. There is a risk to the currency that this could happen, again. It is a view that economists at Lloyds Commercial Banking hold.
The other major challenge to stability is the growing housing bubble. This, however, is a disincentive for the RBNZ to reduce interest rates, as that would make borrowing cheaper and help the bubble grow. Some analysts have suggested this means the RBNZ will not lower rates in the current cycle.
Pound Upside Ahead
What is currently likely - with a 75% probability attached, according to Bookmakers – is that the UK public will vote to remain in the EU, and if this is true then the pound will almost certainly strengthen substantially.
There is therefore a considerable risk of further upside in the pair.
The outlook for central bank policy is also now a factor increasingly impacting on the pound, after being completely side-lined by Brexit.
According to Thursday’s Quarterly Inflation report, which downgraded growth expectations but upgraded inflation forecasts marginally 2 years ahead, there is a possibility investors are underestimating the chances of the BOE raising interest rates earlier than expected (assuming a referendum win for ‘Remain’).
Capital Economics’s Vicky Edwards read this as a “message to the markets” that the Bank of England was closer to pushing the button on a rate hike than previously. If this suggestion takes root and starts to shape expectations of an early interest rate rise, the pound could gain from that in the week ahead.
Data Hotspots in the Week Ahead
As far as data goes it’s a quiet week for the kiwi with only Producer Prices for the first quarter out, on Wednesday May 18.
The week starts with UK April inflation data on Tuesday, with analysts forecasting no-change from the 0.5% previous reading. A rise would support sterling whilst a fall weaken it.
March Average Earnings (plus Bonus) are out on Wednesday May 18, and are expected to moderate to 1.6% from 1.8% previously.
Again a rise would support the pound and vice versa for a drop.
April Retail Sales are forecast to rise 0.6% mom on Thursday. Whilst less significant it will help economist model expected Q2 growth.