GBP/NZD takes off and breaks out

Alan Penny

1 May 2019

3 min read

The British pound has rallied significantly against the New Zealand dollar over the last several sessions, but on Wednesday made a bit of a milestone as we finally got through the 1.9650 level, an area that has been important more than once. After the impulsive candle stick on Tuesday, the follow-through is impressive and it suggests that perhaps there is still a lot of euphoria when it comes to the British pound in the possibility of a second referendum.

The argument for trading against other currencies than the USD

You have to remember that when you trade currencies, you are trading relative strength. If there is some type of downturn or concern when it comes to the global markets, the New Zealand dollar should be hit much more than the British pound. After all, the United Kingdom is a much more “safe economy” then New Zealand which is so highly levered to Asian growth and expansion. This isn’t to ignore the Brexit, obviously that is a major factor as well. However, we already know that the Brexit is a bit of a mess, and although there is uncertainty, even without the certainty being out there, if we get a big sell off of risk appetite, the New Zealand dollar will get hammered. Money will flow back into London, levitating the British pound, at least in relative form.

The technical set up

gbp/nzd daily chart

GBP/NZD daily

The technical set up is pretty simple. We have broken above resistance and follow through on what would have been an impulsive candle stick from the previous session. If that’s the case, it typically will have people jumping into the markets due to a fear of missing out. The 50 day EMA is just below the impulsive candle stick from the previous session, and of course the 200 day EMA is sits just below there. Ultimately, pullbacks at this point will probably offer quite a bit of support all the way down to the bottom of the Tuesday candle stick which is roughly 1.9375 or so.

To the upside, we will more than likely go looking towards the 2.00 level given enough time, but it may take some time to get there. When you look at the chart you can see just how choppy it has been over the last several weeks of this is more of a trend following trade than anything else. Think of it more as an investment, and less of a short-term trade.

The alternate scenario

Obviously, there is the possibility of the alternate scenario. As traders, this is something that we should pay attention to and always take into account. If we were to roll over and break down, a move below the 1.9350 level could be trouble, and send this market looking towards the round number of 1.90 underneath which is the previous basis of the most recent move higher. That should have a lot of support based upon the most recent move, so breaking down below there would be extraordinarily bearish and send this market much lower. At this point though, this scenario seems extremely unlikely.

Written By
Alan Penny

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