The upcoming election in the UK has considerably increased volatility in the Pound as Conservatives are no longer poised to win a huge majority as expected at the time of the announcement of snap elections. Lower than anticipated first-quarter economic expansion, reported in the last week of May, also kept the Pound under pressure.
The Kiwi dollar, on the contrary, had a splendid rally mainly due to strong dairy prices. Overall, the GBPNZD pair fell from a high of 1.8898 to a low of 1.7989 in the past two weeks. However, we expect the Pound to rise against the New Zealand dollar in the days ahead due to the reasons provided below.
The recent UK election survey shows that the lead between the Conservatives and Labour party has narrowed to just around 3%. Initially, the market took a pessimistic view of the poll data. However, it no longer seems to be the case. In a case of a hung Parliament, UK may not be able to even attend the Brexit talks scheduled to begin 11 days after the election. A coalition government could also force the UK to pursue a path of soft Brexit. Such an expectation is now strengthening the Pound against its rivals.
The UK’s economy is also resilient as evident from the IHS Markit’s PMI (Purchasing Manager’s Index) data released last Thursday. The PMI reading stood at 56.7 in May, against the market’s expectation of 56.5, but marginally lower than the previous months’ reading of 57.3. A reading above 50 indicates economic expansion and vice-versa. The Caixin (China) manufacturing PMI reading released on the same day, however, told a different story. The Chinese manufacturing sector contracted in May, as indicated by a PMI reading of 49.6, versus analysts’ expectation of 50.2. Last month, the PMI reading was 50.3.
China is the largest importer of Kiwi dairy products. Thus, a weakness in the Chinese economy is usually felt immediately in New Zealand. Notably, credit rating agency Moody had also downgraded China’s rating from Aa3 to A1. It was the first downgrade in the past thirty years. Thus, fundamentally, the Pound is expected to strengthen against the Kiwi dollar in the near-term.
The GBPNZD pair has violated the descending trend line, as shown in the historic price chart below. The momentum indicator is also rising towards the reading of 100. Thus, we can expect an upswing in the currency cross.
To gain from the probable rise of the GBPNZD pair, we would like to take a long position near 1.8220 in the currency market. For a better risk-reward ratio, we intend to place the stop loss and take profit order at 1.8080 and 1.8390, respectively.
In the binary market, we are considering opening a call option trade on the basis of the above analysis. In such a case, a date around June 13th would be selected as the option expiration date. Additionally, we would also target a strike price of about 1.8220.
Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.
