Pound-to-New Zealand Dollar Week Ahead Forecast: Dips to be Shallow

The pound can eke out further gains against the New Zealand dollar.

The pound to New Zealand dollar exchange rate (GBP/NZD) rose to 2.33 last Friday, but has since pared that advance to 2.3200 at the time of writing Monday.

However, declines are forecast to be shallow in the coming days as a recovery sequence plays out further.

That recovery has emerged since 2.30 arrested the selloff that started in November, and gave GBP/NZD little alternative other than to look upwards again:

The recovery means GBP/NZD now trades above the 21-day exponential moving average, the blue line in the chart, currently at 2.3152.

The level offered support on numerous occasions last week, suggesting it is forming the immediate source of daily support. We would look for any weakness in the opening stages of the week to be shallow, only extending back to 2.3152, before the pair attempts new highs.

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The New Zealand dollar could yet frustrate sterling upside if global stock markets put in a decisive year-end rally, as the Kiwi currency tends to outperform when the mood music is upbeat.

"Risk is on as we enter the penultimate trading week of the year," says Kathleen Brooks, research director at XTB. "Asian stocks surged, and the Nikkei jumped by more than 1.8%. US equity futures are pointing higher."

"Tech stocks are leading this 'Santa Rally'," adds Brooks. "Commodities are also surging."

The New Zealand dollar is often referred to as a 'commodity currency', meaning that it does well when commodity values are rising.

'Santa rallies' are a perennial feature of global markets, but this year's narrative being attached to the move is the Federal Reserve's openness to lower interest rates next year.

The Fed is tipped to cut interest rates on at least two further occasions in H1 next year, which will lower the cost of money not just in the U.S., but globally, given the centrality of the USD to funding.

"Hopes grow that the Fed can continue to cut rates next year as U.S. inflation moderates," says Brooks.

If the tone stays constructive, the GBP/NZD upside we are expecting could be a hard-fought affair.