GBP/NZD Below 1.95, Further Sell-off Likely

GBP/NZD Below 1.95, Further Sell-off Likely

Fundamentals

The New Zealand dollar responded positively to the RBNZ’s rate decision and this move drove GBP/NZD below 1.95. While today’s decision to raise rates by 25bp was widely expected investors were caught off guard by the central bank’s continued concern about inflation, which suggests they still intend to raise interest rates in June. In a nod to the 20% drop in dairy prices and the pullback in consumer demand, the RBNZ started their statement off by saying that future rate rises will depend on economic data. However this new condition was quickly forgotten when the central bank said inflationary pressures are increasing and are expected to continue to rise over the next 2 years. As a result, they felt that a rate hike was necessary to keep inflation expectations contained. At the end of the day, what matters most is yield and their decision to raise interest rates by another 25bp to 3% makes the New Zealand dollar more attractive to foreign investors so for the time being, it looks like the NZD rally remains intact. The British pound on the other hand has found significant resistance below 1.6850. We believe that the currency pair will experience a deeper correction if Friday’s retail sales report misses expectations. The chance of a steep reversal in spending is high given the sharp decline in the BRC retail sales monitor and drop in shop prices and if we are right, it could be just what GBP/NZD needs to break 1.9400.

Technicals

The recent rally in GBP/NZD found resistance right at the 38.2% Fibonacci retracement of the year to date highs and lows. With today’s reaction to the RBNZ rate decision, the currency pair retreated further. There is no major support until 1.9400, the 23.6% Fib retracement of the same move, which is also area where the currency pair found support in mid-March. We expect this level to be tested especially if UK retail sales miss.

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