This week our currency strategists focused on the New Zealand Employment report and Bank of England monetary policy statement for potential high-quality setups in the Kiwi and the British pound.
Out of the eight scenario/price outlook discussions this week, two discussions arguably saw both fundie & technical arguments triggered to become potential candidates for a trade & risk management overlay.
Watchlists are price outlook & strategy discussions supported by both fundamental & technical analysis, a crucial step towards creating a high quality discretionary trade idea before working on a risk & trade management plan.
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NZD/JPY: Monday – February 3, 2025
NZD/JPY 1-Hour Forex Chart by TradingView
On Monday, our strategists had their sights set on New Zealand’s Q4 employment data and its potential impact on the New Zealand dollar. Based on our Event Guide, expectations were for New Zealand employment to decline 0.1% q/q (vs -0.5% previous), with the unemployment rate rising to 5.0% from 4.8%. The labor cost index was expected to show a 0.5% increase.
With those expectations in mind, here’s what we were thinking:
The “Kiwi Climb” Scenario:
If the jobs data came in stronger than expected, we anticipated this could dampen expectations for RBNZ rate cuts. We focused on NZD/CAD for potential long strategies if risk sentiment was positive, particularly given BOC’s recent dovish shift. In a risk-off environment, NZD/JPY long made sense given recent hawkish BOJ comments about potential rate hikes.
The “Kiwi Crash” Scenario:
If New Zealand’s labor market showed significant weakness, we thought this could fuel RBNZ easing expectations. In this case, we considered NZD/JPY for potential short strategies in a risk-off environment, especially given the BOJ’s increasingly hawkish stance on rates. If risk sentiment leaned positive, EUR/NZD long made sense given the ECB’s recent less dovish stance and improving German economic indicators.
What Actually Happened:
The Q4 2024 New Zealand jobs report showed a mixed but generally weak picture:
- Employment fell 0.1% q/q (vs -0.1% expected)
- Unemployment rate rose to 5.1% (vs 5.0% expected)
- Previous quarter suffered a net change downgrade to -0.6% from -0.5%
- Employment rate fell to 67.4% from 67.7%
- Underutilization rate climbed to 12.1% from 11.6%
- Labor force participation dipped to 71.0% from 71.1%
Market Reaction:
This outcome fundamentally triggered our NZD bearish scenarios, and with risk sentiment arguably net negative around global tariff developments, and around recent net hawkish BOJ rhetoric, NZD/JPY became our focus.
Looking at the NZD/JPY chart, the pair had already been trending lower before the data release, testing and holding around the falling ‘highs’ trend line ahead of the event.
Post event release, traders took the market to the minor support area around 86.50, which eventually broke and created a bearish technical signal that could draw in further technical sellers.
This break in support could be largely attributed to hawkish comments from BOJ Head of Monetary Affairs Kazuhiro Masaki about continuing rate hikes, pushing NZD/JPY lower and easily break 86.00 before finding short-term support once again.
On Friday, bearish broad sentiment came to support the yen once again, this time surrounding hot wage growth and negative consumer sentiment data from the U.S., putting pressure on risk assets heading into the weekend.
The Verdict:
So, how’d we do? Our fundamental analysis anticipated potential NZD weakness on disappointing NZ jobs data, which materialized in the actual numbers. Our technical analysis also accurately identified key support levels that were tested and broken during the week.
We think this discussion was “highly likely” supportive of a net positive outcome as both fundamental and technical triggers aligned perfectly and were very clear. The combination of weak NZ employment data and hawkish BOJ rhetoric provided strong catalysts for the downward move, while clear technical levels helped guide trade management.
Complex trade management would not likely have been necessary given the strong momentum lower, and there was even an additional shorting opportunity after a bounce. But this was ahead of the highly anticipated U.S. jobs data update, which could have been a risky move for fresh shorts, but less so for those already trading around a core short position.
GBP/NZD: Wednesday – February 5, 2025
GBP/NZD 1-Hour Forex Chart by TradingView
On Wednesday, our strategists had their sights set on the Bank of England’s monetary policy statement and its potential impact on the British pound. Based on our Event Guide, expectations were for the BOE to cut rates by 25bps to 4.50%, with markets looking for an 8-1 vote split and signals on future policy direction. With those expectations in mind, here’s what we were thinking:
The “Sterling Surge” Scenario:
If the BOE delivered a less dovish tone or gave a more balanced assessment of inflation risks, we anticipated this could support GBP. We focused on GBP/USD for potential long strategies if broad risk sentiment turned positive, especially given reduced expectations of aggressive Fed rate cuts. In a risk-off environment, GBP/AUD long made sense given Australia’s recent mixed jobs data and China trade concerns.
The “Sterling Slump” Scenario:
If the BOE signaled a faster pace of easing or expressed heightened growth concerns, we thought this could weigh on GBP. We eyed GBP/NZD for potential short strategies if risk sentiment stayed positive, particularly given New Zealand’s recent uptick in commodity prices and dairy auction results. If risk sentiment turned negative, GBP/JPY shorts looked promising given the BOJ’s recent hawkish shift suggesting faster rate hikes.
What Actually Happened:
The Bank of England delivered several surprises in their February monetary policy decision:
- Cut rates by 25bps to 4.50% as expected
- Unanimous vote for easing (vs. 8-1 expected)
- Two members (Dhingra and Mann) pushed for a larger 50bp cut
- Projected inflation to spike to 3.7% in Q3 2025 before returning to target
- Signaled a “gradual and careful” approach to future rate cuts
- Noted caution about external factors like higher global energy costs
- Discussed impact of new U.S. tariffs in their assessment
Market Reaction:
This outcome had more net negative surprises, fundamentally triggered our GBP bearish scenarios. And with positive risk sentiment following the U.S.-Mexico tariff delay announcement, GBP/NZD became our focus.
Looking at the GBP/NZD chart, we saw immediate selling pressure ahead of the BOE event, starting right at the London open. It looks like traders were anxious to place their short bets early, and for those who did, were ultimately proven right.
So the event played out to be a “buy-the-rumor, sell-the-news” scenario with the reaction quickly drawing in buyers not too long after the statement. Aside from likely profit taking, it’s possible traders were squaring away some risk to get ready for the U.S. jobs report on Friday.
The Verdict:
So, how’d we do? Our fundamental analysis anticipated potential GBP weakness on a more dovish BOE stance, which materialized even more dramatically than expected with the unanimous vote and calls for larger cuts. Our original technical analysis correctly identified key support levels that broke well in advance of the event. Overall though, there were a couple of bounces post event that drew in net sellers that could have been opportunities to play the short side for a few pips.
With that outcome, we think that this discussion was “neutral” towards being supportive of a net positive outcome since the market did trade lower, but stuck in a tight range for the rest of the week. There were opportunities to trade but constant focus and active risk management would have been required to achieve a net positive outcome.
So a quick takeaway to consider later is that while fundamental analysis correctly predicted the directional move and technical analysis identified key levels, the post-event choppy price action highlights the importance of being selective with entry points.
Even when the broader directional thesis is correct, it’s probably best practice to wait for clear retests of strong areas of interest to gauge market sentiment and structure an entry.
The tight range trading environment also emphasizes that strong directional views should be balanced against actual market conditions – in this case, the dovish cut from the BOE vs. the net negative NZ jobs read lowered the odds of a strong momentum move playing out.
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