We’ve got another Kiwi setup to check out as NZD weakness seems to be a clear theme so far in 2022.
This time we’re pairing it with the U.S. dollar, which is set to likely see a lot of action soon with the latest FOMC statement ahead. Will that push the trend lower in NZD/USD?
On the daily chart above of NZD/USD, we can see a pretty clear textbook pattern signaling a potential bearish move lower.
After a solid drop from around 0.7200 in November to 0.6700 in December, NZD/USD consolidated into a rising wedge pattern into 2022. And this week, the market broke that pattern, which is typically a bearish continuation signal and likely to draw in technical sellers.
These moves are likely driven buy U.S. dollar strength, which has been fueled by a mix of risk aversion behaviors (rising negative pandemic conditions & expectations of slower growth) and increasing odds of an accelerated monetary policy tightening schedule by the FOMC to combat high inflation conditions.
And broad Kiwi bearishness has been a thing since November, likely a result of traders taking down longs after the Reserve Bank of New Zealand hiked interest rates twice in Q4 2021 as expected (and priced in ) throughout the latter half of 2021.
Going forward, these drivers aren’t likely to change in the short-term, but we’ll have to wait-and-see what the FOMC gives the market tomorrow with their latest monetary policy statement before gaining a little more certainty.
Expectations are that the Fed will hint at a March rate hike and the beginnings of their balance sheet unwinding in Q2 or Q3 of this year. But the question is whether or not they will be more or less aggressive than these expectations?
We’ll see when we get there but for now, we’ll be watching the event for a more aggressive tone than expected from the Fed before considering a short position on NZD/USD. And if that scenario comes to pass, we’ll consider timing our entries to either a retest of the broken wedge/major support area (around 0.6700 – 0.6750) or possibly a scale-in entry strategy if there is no “sell-the-news” type bounce.
Also, if the Fed scales back their expectations of future rate hikes and/or reducing their balance sheet (likely due to recent data and surveys pointing to slowing growth ahead), that could be a catalyst for a reversal of recent dollar strength and broad risk-off vibes.
But what do y’all think? Will the Fed stick to hawkish rhetoric or will recent signs of a recovery slowdown change their tune? Please let us know in our comment section below!
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