GBP/NZD has been going lower since the past 3 years as a result of stronger Kiwi economic fundamentals versus UK’s ailing economy. However, this trend hit a snag back in Q4 2012 when Kiwi’s unemployment rate and GDP figures took a surprising dive, while UK appeared stronger for the better towards 2012 year end. Despite this, GBP/NZD continued its journey south as rate differentials between both currency and long term economic outlook continue to shine despite the recent snag.
Yesterday’s Bank of England (BOE) Inflation Report certainly did GBP any favors. Pound Sterling had a mild pop higher when it was revealed that BOE believes that inflation would likely stay above the 2% inflation target until mid-2016. Prices rallied as traders interpreted it as a narrowing of scope for further expansionary measures BOE would be able to adopt from here on out. However, these group of traders has neglected the fact that BOE’s inflation target has not been met since 2009. Despite this, BOE continued to oversee a loose monetary policy and expanded the Asset Purchase Facility to 375 Billion Pounds. In this current Inflation Report, BOE stated that it expect a “slow but sustained recovery” in the near term and will provide additional stimulus as required. Though the stance on loose monetary policy remains the same, with the bearish backdrop of GBP/NZD, it is easy to understand why price collapsed like a deck of cards post announcement.
Price bounced from the top of the channel and was briefly supported around 1.85 round number. This morning we saw a continuation of the downtrend due to better Kiwi economic figures. NZ Manufacturing Index grew to 55.2 vs previous month’s reading of 50.4. Food Price Index has also gain by 1.9% in January vs previous month of -0.2%. These bullish figures broke GBP/NZD below 1.85 convincingly, with price subsequently finding support around 1.83 and the confluence with the channel bottom.
Current price may find further bearishness harder with Stochastic indicator entering Oversold region. It is also pertinent to note that price remained firmly in the descending channel – a representation of current bearish momentum – despite bears having bearish GBP and bullish NZD fundamental factors aligning themselves in 12 hours. This suggest that inherent bearishness in the short-term may not be as strong as we think, and should the BOE’s report was mildly hawkish, we price could have easily held 1.85, or perhaps even break the 1.865 ceiling – something that it was attempting to do before the report.
Weekly chart has less optimism for bulls though, with price breaking the significant 1.865 level, hinting at a bearish breakout. However, it is also not uncommon to see a retest of the previous support before a confirmation of the bearish breakout can be sought. Stochastic indicator is also showing a bottoming suggesting a short-term pullback is still possible.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.