GBP/NZD set for big move on Brexit and RBNZ rate review

Forex traders eye spot GBP/NZD

• GBP/NZD has broadly gyrated between $1.85-$2.00 since September 2017, but has potential to breakout from its two-year trading range
• GBP/NZD could be primed for a big move as the currency pair faces fundamental crosscurrents surrounding Brexit and the RBNZ
• Brexit developments and monetary policy updates from the RBNZ will likely serve as the domineering catalysts for the currency pair’s next move

The pound, long bogged down by lingering Brexit uncertainty, and the New Zealand dollar, which has faced increased pressure from dovish Reserve Bank of New Zealand (RBNZ) monetary policy, are currencies that both appear set for heightened volatility over the coming days. Consequently, though a less conventional forex pair, spot GBP/NZD could be set for a big move over the short and medium terms.

Brexit risk elevated as 31 October deadline nears

Much regarding the UK’s departure from the European Union (EU) remains unresolved despite British MPs voting to block no-deal Brexit and forcing Prime Minister Boris Johnson to request another extension to the current 31 October divorce date. First and foremost, inking a Brexit withdrawal agreement is still a way away considering commentary from Michael Barnier, the EU’s chief negotiator, who recently said that PM Boris Johnson’s alternative solution for the Irish backstop is 'unacceptable'. Secondly, delaying Brexit for a third time will once again require unanimous approval from the EU, some who whom voiced disdain after granting the previous deferment.

Markets await RBNZ monetary policy update

Meanwhile, the RBNZ is set to provide its latest monetary policy update this week following the central bank’s August meeting, which delivered a shocking 0.50% cut to its overnight cash cate and second dovish action of the year.

The RBNZ has labelled downside risks to the New Zealand economy stemming from the US-China trade war and its impact on global gross domestic product (GDP) growth, in addition to persistently sluggish inflation readings, as the primary culprits leading to the decisions. In turn, it could be expected that the RBNZ may cut rates further to provide the New Zealand economy with another layer of monetary policy insulation.

At the same time, the central bank could favour a more patient approach going forward as it evaluates the impact from the 75 basis points of cuts already made. That said, while awaiting further clarity on where spot GBP/NZD might head next as the fundamental developments surrounding Brexit and monetary policy decisions from the RBNZ unfold, the long-term technical backdrop of this currency pair could provide some insight.

GBP/NZD price chart: monthly time frame (January 2008 - September 2019)

The $2.00 handle has historically served as a major zone of technical confluence highlighted by key monthly levels dating back to 2008, which could keep a lid on further upside progression by the sterling (barring any Brexit breakthrough or full throttle dovish tilt by the RBNZ, of course). This area of resistance is also underscored by the 38.2% Fibonacci retracement level of the currency pair’s 14-month slide beginning in August 2015 from $2.5206 to $1.6480.

GBP/NZD price chart: weekly time frame (September 2016 - September 2019)

Honing in on a closer time frame reveals the near-vertical climb in spot GBP/NZD since early August. The move was sparked by a surprise 50-basis point cut from the RBNZ with upside subsequently exacerbated by Brexit news pointing to the reduced likelihood of a no-deal departure.

However, the high of $2.0027 priced back in early May, which aligns with the RBNZ’s first interest rate cut of the year, and last week’s swing high of $2.0005 could pose immediate obstacles for further upside in spot GBP/NZD prices. Looking a little further back brings to light the September 2018 high of $2.0033 before the October 2018 peak of $2.0481 comes into scope, though the former reverted to a fresh year-to-date low the very next month.

Focusing on possible areas of technical support draws attention to confluence around the $1.95 level and 23.6% Fibonacci retracement level of the trading range etched out by GBP/NZD since October 2016. The 10, 20 and 50 simple moving averages (SMA’s) around $1.9150 could provide spot prices with a degree of buoyancy while the $1.90 handle noted by the 38.2% Fibonacci retracement level of the previously mentioned bullish leg might serve as an additional line of defense.

That said, keeping close tabs on changes in IG client sentiment data can offer insight on potential reversals and range trading opportunities as the bearish or bullish bias of retail forex traders oscillate.

IG client sentiment - the pound and New Zealand dollar

Since GBP/NZD is a less liquid cross for both the pound sterling and New Zealand dollar, attention turns to NZD/USD in particular, which has seen a big change in open interest and massive shift in positioning since last week and in the runup to the September RBNZ rate decision. In fact, net longs have jumped 69% whereas net shorts dropped a whopping 43% according to the latest retail forex trader positioning data from IG.