The pound has weakened versus the kiwi.
Following the formation of its three-wave a-b-c corrective pattern higher – see chart below – the pair tipped the topside of the descending channel and then started moving lower.
The Bank of England (BoE) meeting on Wednesday and the Chancellors disappointingly austere budget kept alive concerns that the BOE may have to do a U-turn and from hopes of an interest rate rise contemplate a rate cut instead.
This caused a sell-off in sterling against the New Zealand Dollar which can clearly be noted on the chart. The pound’s mild recovery since Wednesday, is unlikely to hold and the exchange rate will probably start moving lower again on Monday.
Given the correction so far has still only formed a three-wave a-b-c correction higher, this could just be a correction within the dominant down-trend, and as such there remains the possibility the pair could capitulate and move lower again, with a break below the 2.0841 B wave lows confirming a move down to at least re-touch the 2.0623 February 26 lows.
The Bullish Case
Indicators are pointing to the possibility of a broader market reversal, with MACD sharply converging with price and confirmation from On Balance Volume (OBV) which is also converging with price.
When indicators converge with price it is a bullish signal as new lows in price fail to create new lows in momentum or volume, signalling a loss of underlying strength in the down-trend.
In this case the lack of momentum and volume as measured by MACD and OBV gave early warnings of the possibility of a correction higher, which may be the start of a broader up-move, however, for more confirmation we would ideally wish to see a break above the 2.1502 highs before committing, as well as a break out of the descending channel and above the 50-day moving average at 2.1671.
A clear move above these formidable resistance levels would help signal a more convincing rally higher, with a break above 2.1800 providing confirmation of an extension up to a target at 2.2047 at the R1 monthly pivot.
New Zealand showing robust economic outlook
Desperately low dairy prices remain the Achilles Heel of the New Zealand economy, which would otherwise be fundamentally sound.
Like Australia ,New Zealand benefits from a strong housing market, relatively low unemployment, inflation close to target and a high central bank base lending rate, however, a continued fall in dairy prices is killing the country’s number one industry, whereas in Australia the recovery in hard commodities is starting to ease the pain.
The last statement from the RBNZ (which cut rates to 2.25%) suggested it might cut the interest rate further to 2.0%. If so then the pound will gain traction higher, and the current indecisive correction might turn into a more protracted rally.
The one major obstacle holding sterling back, however, is uncertainty over Brexit, and with polls suggesting the vote may be even closer than previously thought the pressure on the pound is unlikely to ease any time soon.
Economic Data to Watch for GBP
Headline UK CPI (yoy) is forecast to come out at 0.4% in February from 0.3% previously.
The previous three prints were positive.
UK Public Sector Net Borrowing for February is expected to rise to 5.4bn from -11.8bn previously.
Economic Data to Watch for NZD
New Zealand Data is unlikely to be market moving in the week ahead, with the Trade Balance for February, out on Wednesday March 23 the most significant data release.
Exports are expected to rise whilst Imports to remain the same leading to an increase in the Trade Surplus to 90m from 8m in the previous month.
If the data exceeds expectations the New Zealand dollar will probably rise.
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