Image © Adobe Stock
The Pound has reached its highest level since December 2015, but now looks prone to a pull back in order to correct from overbought conditions.
The Pound-to-New Zealand Dollar exchange rate (GBPNZD) rallied to 2.2518 on Monday, its highest level since December 2015, as a multi-year trend of appreciation entered a new chapter.
The gains carried the exchange rate above December 2024's peak at 2.2425, confirming a technical break higher is underway that would naturally open the door to an extension of the rally.
However, there are some signs that a pullback is due in the near term, which is something we would anticipate to characterise trade in the coming days.
Firstly, GBPNZD now trades well above the nine-day exponential moving average, currently at 2.2269. Typically, being above the nine-day EMA would advocate for further near-term gains.
Above: GBPNZD at daily intervals.
However, notable deviations away from the nine-day EMA are prone to correction as part of a mean-reverting tendency. We think GBP/NZD will pull back towards the rising nine-day EMA and forecast a return to 2.24 this week.
Expectations for a retreat from overbought conditions are reinforced by the Relative Strength Index (RSI), currently at 72.08, which means it is technically overbought.
The RSI will ultimately fall below 70 soon, and this would reflect a consolidation or shallow retreat in the spot exchange rate.
Any retreat would likely require a fundamental trigger. The key event to watch this week is Tuesday's decision by the U.S. on whether to proceed with 25% tariffs on Mexican and Canadian imports.
If President Trump does proceed, it will signal that he intends to pursue an incredibly 'hawkish' trade policy, with further victims in his sights.
This would serve as a significant setback to global trade and sentiment, which would be particularly harmful to small, open economies such as New Zealand.
Above: Trump said at the first cabinet meeting of the administration that tariffs would proceed this week. The comments caused risk-on assets like NZD to decline. Official White House Photo by Molly Riley.
Even if New Zealand itself is not directly targeted, the impact on the country's trade partners is where the damage lies.
Research from Capital Economics finds that over the Trump 2.0 era, the Australian and New Zealand dollars have "fared worse than almost every major currency, developed or emerging market."
"We think they will continue to do so," says Thomas Mathews, Head of Markets for Asia Pacific at Capital Economics.
Reasons for the underperformance include vulnerabilities to swinging investor sentiment and they’re more exposed to China than many, especially among developed market currencies. "China itself is of course a direct target of Trump’s tariffs," says Mathews.
However, the NZD would benefit if U.S. President Donald Trump announces a delay to tariffs on Mexican and Canadian goods or announces a package that is less severe than the 25% import tariff he has touted since coming into office.
This would be consistent with a view that further tariff packages will be prone to negotiation, meaning a worst-case global tariff outcome is ultimately avoided.
For risk-sensitive, pro-trade currencies, such as the NZ Dollar, this is a supportive development and one we think is highly likely this week.
But what mood is Trump in? Will he be all-out 'hawkish' and announce maximalist tariffs on Canada and Mexico, in line with his 'hard man' stance that was on display on Friday when he clashed with Ukrainian President Volodomyr Zelensky in the White House?
Or will he be the familiar Trump that we got to know in his first term, where tariffs were watered down, delayed or ultimately cancelled following negotiations? Recall that in his first term, Trump ultimately cancelled tariffs placed on Mexico after just three days following concessions made by Mexico.
U.S. Commerce Secretary Howard Lutnick on Sunday confirmed tariffs were still going ahead, but he said they are yet to be determined. He noted concessions from Canada and Mexico had been made, which suggested some type of compromise would be reached.
Any hint of compromise will be taken as pro-risk, which would benefit the likes of the New Zealand Dollar.
The Pound would come under broad pressure under any tariff-inspired relief as it has proven to be something of a safe haven amidst tariff fears.
Last week, Trump hinted that the U.S. and UK would work towards a trade deal, which carves out the Pound as relatively insulated from the tariff threat. However, when that threat recedes, any safe-haven premium must be unwound, which could result in GBP weakness.
Image © Adobe Stock
We will also be watching China this week, where the 'two sessions' get underway.
This is the annual meeting of China's top legislature, the National People's Congress (NPC), and the top political advisory body, the National Committee of the Chinese People's Political Consultative Conference (CPPCC).
Here, the direction of the economy will be decided. Investors are looking for signs that authorities plan to boost stimulus in anticipation of any tariff-inspired slowdown.
This would help the New Zealand Dollar, which trades as a proxy to China, as New Zealand is highly reliant on trade with China.
"The tariff war between the U.S. and China may encourage the Chinese government to announce stronger demand stimulus at this week’s National People’s Congress to offset the negative impacts of tariffs on the external sector," says Clifton.