Pound in focus as Osborne prepares to deliver budget

It is going to be a big day for the UK assets with the budget due for release shortly and after this morning’s slightly stronger than expected jobs and wages data. Although Chancellor George Osborne is expected to announce few surprises at this budget, certain stocks and/or sectors will be impacted in one way or the other. The pound is also likely to turn volatile should Mr Osborne deliver a surprisingly cautious or surprisingly optimistic economic policy updates. But according to the latest ONS data, the UK economy is not doing too badly for the number of people claiming unemployment-related benefits has dropped to the lowest level since April 1975. Added to this, wages are continuing to grow, with earnings including bonuses rising by an above-forecast 2.1% year-over-year in the three months to January, compared to 1.9% previously. It could also be that Brexit risks are overstated, although as my colleague Matt Weller highlighted yesterday, a Telegraph’s poll suggests that there is a clear enthusiasm gap in favour of leaving the EU. But today, traders are likely to put Brexit fears on the backburner and instead concentrate on the budget and then the FOMC statement/press conference later in the day.

The GBP/NZD could be an interesting pair to watch, particularly for those who are beginning to turn bullish on the pound. The big caveat, though, is that the on-going Brexit risks are likely to keep the pound under pressure, so traders may want to adjust their expectations about the potential gains accordingly. But if the pound was going to rebound, traders might as well play it against a weaker currency. Although interest rates in New Zealand are among the highest across the developed nations, making the NZD a relatively strong currency, last week’s move by the RBNZ to trim rates took everyone by surprise. The potential for further rate cuts could weigh on the New Zealand dollar going forward, particularly if key commodity prices (e.g. milk) weaken further and the economic situation in New Zealand’s largest trading partner, China, deteriorates even more. So, the NZD may be strong now, but this could change dramatically.

From a technical point of view, the GBP/NZD is still stuck inside a well-established bearish cannel and price is holding below both its 50- and 200-day moving averages. At this stage therefore, the sellers are still in control and there is a possibility that the cross will drift lower now that it has reached the top of its channel at just shy of 2.1500. The short-term support to watch is at 2.1250, a level which was previously resistance. Below here is the long-term support and resistance level of 2.10, followed by the 61.8% Fibonacci retracement of the entire 2013-15 bull trend at 2.0575.

But within this bearish channel, the GBP/NZD has been displaying some bullish-looking price action late, which suggests that a breakout above the key 2.1500 handle may occur in one of these days.  For one, the long-term support around the 2.10 handle has held firm. For another, the bearish momentum has faded strongly. Although the RSI is not at 60, which would confirm a shift in momentum from selling to buying, it has nonetheless broken above its bearish trend line. A breakout in the RSI typically precedes a breakout in the underlying price. So this is definitely something to bear in mind.

IF the 2.1500 hurdle breaks, then there is little further resistance seen until the previous support-turned-resistance area between 2.2300 and 2.2450. So, there is a possibility for a big rally. Conservative traders may therefore wish to wait for this breakout to happen before thinking of going long. The only other potential resistance above 2.1500 that can be seen on this daily time frame is the 50-day moving average, currently at 2.1640.

 

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