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GBP/USD, NZD/USD: Still riding the soft landing, weaker US dollar wave

Article By: ,  Market Analyst
September 25, 2024 5:13 AM
  • GBP/USD and NZD/USD have performed strongly over the past month 
  • US dollar weakness, soft landing hopes have been influential
  • Bias remains to buy dips and breaks unless the price action suggests otherwise

Upside in GBP/USD and NZD/USD has been fuelled by a combination of US dollar weakness and optimism towards the UK and New Zealand economies given their cyclical characteristics. But with a lot of good news now priced in, and having run so hard already, both screen as vulnerable to reversal should the macro picture change.

With little on the economic events calendar in either nation over the remainder of this week, and with only US jobless claims and PCE inflation, incomes and spending data likely to move the dial abroad, we look at the price signals for clues as to whether the bullish run can continue.

Economic optimism fuels upside 

Before looking at the technicals, it’s obvious based on the correlation analysis below that both GBP/USD and NZD/USD have benefitted from improved sentiment towards the global economic outlook, in part due to the Federal Reserve starting its easing cycle which has narrowed rate differentials and softened the US dollar.

GBP/USD is shown in the left-hand pane and NZD/US on the right.

From top to bottom, the rolling 20-day correlation with relative yield differentials with the United States is shown in blue, copper futures in red, silver in green, USD/CNH in purple, AUD/USD in yellow and with each other in black.

Except for rate differentials with the Kiwi, the strength of the correlations with cyclical currencies and commodities suggests the perceived improvement in the global economic outlook has been a key factor underpinning recent gains.

GBP/USD rally pauses at familiar level 

GBP/USD upside has been fuelled by that optimism, rising to fresh multi-year highs on Tuesday. Sitting in an ascending channel and with RSI (14) and MACD generating bullish signals on momentum, the bias remains to buy dips and breaks rather than sell rips.

The bullish move is showing few signs of faltering, although it’s interesting the price wasn’t able to break through resistance at 1.3433 on the first attempt earlier today, providing traders with a potential level to build setups around.

If we were to see cable push above this level, traders could buy the break with a tight stop below for protection. The obvious initial target would be 1.3644, a level the price was rejected at on multiple occasions back in early 2022.

Alternatively, if the price cannot break 1.3433, another option would be to sell with a tight stop above the level for protection. 1.3274 would be one potential target with only channel support located in between.

NZD/USD hits 2024 highs

Given its closely tied to the fortunes of the global economy, it comes as no surprise that NZD/USD blasted to fresh 2024 highs following China’s latest stimulus announcement on Tuesday.

Having broken long-running downtrend resistance, and with momentum indicators providing bullish signals without being overbought, there could further upside to come for the Kiwi as speculation swirls that China may announce fiscal stimulus measures in the coming days to boost flagging domestic demand.

Put simply, ahead of Golden Week holidays in China, risks appear skewed to the upside near-term even after the run we’ve seen.

One option is to buy the break now with a tight stop below for protection, although that screens as a lower probability play with the pair sitting in between two levels.

My preference would be to wait for a potential pullback towards .6300, allowing for a stop to be placed below the level or former downtrend for protection. Alternatively, if we see a push above .6370, you could buy the break with a tight stop below for protection. For the latter setup to work from a risk-reward perspective, you’d need to target .6540

-- Written by David Scutt

Follow David on Twitter @scutty

 

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