GBP Signals Bullishness on Rise in Inflation Rate

GBP Signals Bullishness on Rise in Inflation Rate
May 9, 2016

The real impact on the economy of Britain from a probable exit from the EU is largely unknown. While there are arguments in favor and against the exit, the speculators in the forex market piled up profits by going short on every rise of the Pound. However, with just seven weeks to go for the referendum, the downtrend in the Pound now seems to be over or temporarily halted. This is particularly true in the case of GBPNZD currency pair.

The Bank of England is scheduled to publish the quarterly inflation report and announce the interest rate decision on May 12, 2016. While the market participants and analysts do not expect any change in the interest rates, the inflation data would be closely watched.

In the past three reports, the inflation rate stood higher than anticipated. In fact, according to the Office for National Statistics, the inflation rose to 0.5% in March. However, the market largely played it down. However, it may not be the case this time. The gap between the prevailing exchange rate of the Pound and where it should be based on the inflation rate expectations would be certainly closed sooner. If not, the interest hike expectations would force the market to fill the gap.

Beginning May, the New Zealand dollar was one of the worst performing G-10 currencies. The main reason was the decline in the value of the Aussie. The rate cut by the Reserve Bank of Australia (RBA) followed by the gloomy monetary statement led to the decline in the exchange rate of the Aussie. With the Aussie interest rate at 1.75%, the Reserve Bank of New Zealand would be hard pressed to go for a rate cut. The current interest rate in New Zealand is 2%. If the interest rate is left unchanged, it would seriously affect the dairy exports and tourism. In this regard, the market will closely look at Reserve Bank of New Zealand’s financial stability report slated for publication on May 11th, 2016. A rate cut would increase the dairy exports and boost inflation.

Thus, the market is betting on a rate cut soon. So, fundamentally, the GBPNZD pair can be expected to turn bullish in the coming week.
The GBPNZD pair is currently trading near the major support at 2.0809. Technically, as the chart indicates, the momentum indicator has crossed above the reading of 100. Furthermore, the main line of the MACD is above the zero level and the signal line. This indicates that an uptrend is about to begin in the GBPNZD pair.

GBPNZD - Technical Analysis - 9th May 2016

So, considering the technical and fundamental aspects, a currency trader should enter a long trade with stop loss at 2.0630. The long position should be diluted when the currency pair nears 2.21 levels.

In the case of a binary options trader, the uptrend should be capitalized through the purchase of a one touch call option contract. The trader should wisely choose a target price near 2.14 levels. Any expiry date in the second week of June would be suitable for the trade.



Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world

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