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While taking a long GBP position may look risky with the EU Withdrawal bill currently being voted on, a GBPNZD technical set-up looks a fair risk-reward trade if we can get in around support. Due to potential GBP volatility we will build in a buffer when trying to enter the trade and will keep a tight stop on any long position as a full break of support will probably be triggered by a breakdown in Brexit talks.
Sterling is currently under downward pressure over Brexit worries and more directly, internal fighting within the ruling UK Conservative Party. The Brexit amendment bills being voted on over the next two days – June 12/13 – should give some clarity to this situation aiding Sterling traders in their decision-making process. The Bank of England meets next week on Thursday and while there are no expectations of any change in UK monetary policy, any subsequent MPC chatter may increase expectations of an August rate hike. August expectations of a 0.25% BoE rate hike currently stand just below 50/50. In contrast the Reserve Bank of New Zealand is unlikely to raise rates for the next 12-18 months, according to Reuters data, and may well cut rates. At their last meeting the RBNZ stated that a number of risks are evenly balanced and ‘if any of these risks were to materialize, we may need to change the official rate to best ensure inflation hits our target and we contribute to maximum sustainable employment’.
A look at the daily GBPNZD chart shows a solid support zone between the 38.2% Fibonacci retracement level at 1.8885 and a cluster of recent lows around 1.8910. A re-test of this area may open an opportunity for a short- to medium-term GBPNZD long with the 200-day moving average at 1.9220 and the 23.6% Fibonacci retracement at 1.9250 the initial upside target and the second target at 1.9450. The RSI indicator is also nearing its recent low level and may provide a secondary level of support.
The loss/reward settings in our trade set-up are 1.25 to 3.50 for our first target and 1.25 to 5.50 for our second target.
GBPNZD Daily Price Chart (June 2017 – June 12, 2018)
Entry Point: 1.8900 – Support cluster.
Target 1: 1.9250 – 23.60% Fibonacci retracement.
Target 2: 1.9450 – January 25 and February 8 intermediate highs.
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--- Written by Nick Cawley, Analyst
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