Pound to Resume Decline on Widened Trade Deficit

Pound to Resume Decline on Widened Trade Deficit
August 15, 2016

 
After hitting a low of 1.7720, the GBPNZD pair made a reversal, which was partially aided by a better than expected July’s construction PMI reading of 45.6. The GBPNZD ended last week at 1.7931. The recovery looks impressive. Still, we are highly cynical about the continuation of the uptrend in the pair. Our argument is strengthened by the fact that the New Zealand economy continues to remain buoyant. In summary, a short position or a one touch put option should be the ideal trade of choice due to the facts presented below.

The UK’s Office for National Statistics stated that the Index of production declined 0.3% in June, compared to the previous month. The analysts were expecting the production index to remain flat on an m-o-m basis. Similarly, the Office for National Statistics also reported that the UK’s trade deficit in June widened by £0.9 billion m-o-m to £12.4 billion. While the exports increased by £1 billion to £24.6 billion, the imports increased by £1.8 billion to £37 billion.

On the other hand, the economic data released by the Statistics New Zealand indicate that the retail sales volume sequentially increased 2.3% in the quarter ended June. It is the largest recorded gain since 2006. The analysts were expecting a retail sales growth of 1%. Likewise, the core retail sales increased 2.6% on a q-o-q basis, against the analysts’ expectation of 1.1%. For the quarter ended June 2016, the value of retail sales increased by 5.5% ($1 billion) y-o-y to $19.9 billion.

Overall, the economic data indicates that the GBPNZD pair will remain in a downtrend for the next few weeks.

The GBPNZD pair is moving within the descending channel as shown in the chart below. The major resistance for the cross exists at 1.8150. Minor support exists at 1.7880 levels. The MACD indicator continues to move below the zero level, thereby indicating persistent bearishness in the counter.

GBPNZD - Technical Analysis - 15th August 2016

Thus, speculating a downtrend in the GBPNZD pair by taking a short position near 1.8000 seems to a suitable option at this point in time. With a stop loss order above 1.8250, large capital erosions can be avoided. The short position can be diluted when the pair falls to 1.7080 levels (calculated using Fibonacci extension lines).

As far as a binary trader is concerned, trading a one touch put option contract is justifiable in the current scenario. The trader should also negotiate a strike price of 1.7500 or higher for the advised put option trade. Finally, from the time of purchase, the contract should remain active for a time span of at least one month.

Sammy

Sammy

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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