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Talking Points:

- NZD/USD Recovery Vulnerable to Dovish RBNZ Parliament Testimony.

- GBP/USD November Rebound Unravels Ahead of BoE Rhetoric.

DailyFX TableNZD/USD

NZD/USD extends the rebound from earlier this month, with the pair quickly approaching the November-high (0.6980), but the Reserve Bank of New Zealand’s (RBNZ) Financial Stability Report (FSR) may rattle the near-term recovery in the exchange rate should the central bank cast a dovish outlook for monetary policy.

With acting Governor Grant Spencer scheduled to testify in front of Parliament’s Finance and Expenditure committee, the central bank head may merely attempt to buy more time especially as the coalition government under Prime Minister JacindaArdern pledge to review and revise the RBNZ’s mandate. With that said, Governor Spencer is likely to reiterate that ‘monetary policy will remain accommodative for a considerable period,’ and a batch of dovish rhetoric may ultimately dampen the appeal of the New Zealand dollar as the RBNZ remains in no rush to lift the cash rate off of the record-low.

NZD/USD Daily Chart

NZD/USD Daily Chart
  • Topside targets remain on the radar for NZD/USD as the pair initiates a series of higher highs & lows, while the Relative Strength Index (RSI) appears to be breaking out of the bearish formation carried over from August.
  • Break above the 0.6940 (61.8% expansion) to 0.6950 (38.2% retracement) region raises the risk of seeing a run at the monthly-high (0.6980), with the next topside hurdle coming in around 0.6990 (50% expansion).
  • First downside region of interest comes in around 0.6820 (23.6% retracement) to 0.6870 (50% retracement) followed by the 0.6780 (100% expansion) to 0.6790 (50% retracement) which largely lines up with the 2017-low (0.6780).

The British Pound struggles to hold its ground as the Bank of England’s (BoE) Financial Stability Review revealed five of the seven major U.K. lenders passing the latest stress test, and GBP/USD may continue to face near-term headwinds as Governor Mark Carney and board member David Ramsden are scheduled to speak at an event held by the FICC Markets Standards Board (FMSB).

Even though the BoE ‘judges the U.K. banking system could continue to support the real economy through a disorderly Brexit,’ Monetary Policy Committee (MPC) officials may largely endorse a wait-and-see approach ahead of 2018 as ‘there remain considerable risks to the outlook, which include the response of households, businesses and financial markets to developments related to the process of EU withdrawal.’ As a result, the BoE may continue to tame expectations for an imminent rate-hike, and the fresh batch of central bank rhetoric may dampen the appeal of the British Pound as Governor Carney and Co. appear to be in no rush to further normalize monetary policy.

Keep in mind, the BoE may stay on course to implement one rate-hike per year as ‘the MPC’s most recent assessment of the outlook for inflation and activity, contained in the November Inflation Report, was conditioned on a market path that implied two additional 25 basis point increases in Bank Rate over the three-year forecast period,’ and the pound-dollar exchange rate may exhibit a more bullish behavior over the coming months as the central bank starts to unwind its easing-cycle.

GBP/USD Daily Chart

GBP/USD Daily Chart
  • Broader outlook for GBP/USD remains constructive as the upward trend from earlier this year remains intact, but the pair may continue to pullback from the monthly-high (1.3383) as it initiates a fresh series of lower highs & lows.
  • Keeping a close eye on the Relative Strength Index (RSI) as it appears to be turning around ahead of overbought territory; may see a bearish trigger evolve as the oscillator comes up against trendline support.
  • With the near-term outlook capped by the 1.3370 (78.6% expansion) region, the 1.3210 (50% retracement) hurdle stands on the radar, with the next downside region of interest coming in around 1.3090 (38.2% retracement) to 1.3120 (78.6% retracement) followed by the November-low (1.3039).

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--- Written by David Song, Currency Analyst

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