NZD/USD: Near Term Drop Expected Before RBNZ-Induced Rise

Summary:

The NZD/USD could experience a drop in the short term, before rate hikes by the RBNZ force the pair to the north.

Deteriorating economic data from New Zealand has not stopped the Reserve Bank of New Zealand from pursuing an aggressive rate hike policy. The RBNZ’s monetary policy focuses on home prices and inflation. The market has priced in a 25bps-50bps rate hike in July by 100%, with a one in five probability of a 75bps rate hike. This could be followed in August by another rate hike ranging from 25bps to 75bps. A target of 125bps by September 2022 is on the cards.

This expectation has expressed itself in the Commitment of Traders (COT) report, showing that the ratio of net longs to net shorts on the NZD/USD is roughly 2:1. The number of net longs has risen nearly 17% from the previous week, while net shorts have dropped 24% from the previous week.

Technically speaking, the picture on the NZD/USD 4-hour chart favours a drop in the pair. The progressively lower recent highs and the breakdown of the 0.62835 neckline support favour an additional downside move that will test the bulls’ resolve at the 0.62220 pivot. This pivot will determine the future price action of the pair.

Currently, the NZD/USD is trading lower at %, on the back of a strengthening of the US Dollar ahead of the Fed Chair’s testimonies before the Senate Banking Committee and the House Committee on Financial Services.

NZD/USD Outlook

The breakdown of the 0.62835 support following the progressively lower highs of 16 June and 21 June favour completion of the downside move at 0.62220. If the bulls fail to defend this support level, 0.61548 becomes the next target to the south. Finally, 0.60464 and the psychological price mark at 0.60072 serve as additional southbound targets.

On the other hand, a successful defence of the 0.62220 support allows the bulls to push off this pivot toward the 0.62835 neckline resistance. A break of that level also gives the bulls clear skies to aim for the 16 June top at 0.63820. Above this level, other targets to the north rest at 0.64256 (24 May low and 10 June high) and 0.65050, where the 1 June and 6 June tops lie.