Range Expansion Puts GBP/NZD Back Onto The Radar

New Zealand’s business confidence moved sharply lower in November, with new government policies and softer house prices largely at blame according to ANZ’s business outlook. With business activity dropping to its lowest level since March 2009 traders were quick to dump their Kiwi Dollars early Asia across the board. This is in stark contrast to Sterling which remain broadly supported by hopes that Brexit talks are actually moving forward, and helping to provide an almost-perfect pergent theme for GBP/NZD.

GBP/NZD is providing a powerful trend structure with prominent swing lows, whilst bullish momentum is increasing at the highs. There is a bearish RSI pergence, but it also appears on the cusp of breaking its own retracement line which could be taken as another bullish signal. There has been some volatile retracements along the way, but when it reverts to the dominant trend, price action tends to be clean and eager to push to new highs.

British Pound New Zealand Dollar

Price action of the past two weeks (and in particular this week) has put GBP/NZD firmly back on our radars. After teasing the October highs on the 17th November, the cross embarked up a low volatility retracement against the bullish trend for the next six sessions. Under this scenario we typically seek range expansion to revert in line with the dominant trend before initiating a position. But on this occasion, Brexit related news sent volatility in the opposite direction. Initially at least.

Following reports that the UK had reached a deal on the Brexit porce bill, the UK government pushed GBP crosses markedly lower by denying such ‘rumours’. That the low of the session stalled just above the closing price of the day of Brexit and also provided a bullish hammer suggest there is strong demand at this milestone level. And that GBP/NZD has since powered ahead and now sits at its highest level since Brexit underscores the excitement markets have with a potential cloud lifting from UK’s Brexit talks.

As tempting it may be to hop on board the bullish trend, we prefer to wait for signs of price compression on the daily timeframe. Such price action could include a low volatility retracement or continuation pattern. By doing so we aim to reduce the odds of jumping in on hype and assess the technical picture when the trend (and hyped-up market participants) have had time to reflect and take a breather.

However, whilst the technical landscape looks promising for bulls, we should remember that it is a combination of politics and economics which has driven GBP/NZD to dizzy new heights. Either of these two drivers can quickly change for either economy, and with it, the trend can revert to the mean, provide a sharp pullback or change direction.

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