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NZD/USD: NZ Government Curbs Growth Outlook, H&S Formation Takes Shape

NZD/USD: NZ Government Curbs Growth Outlook, H&S Formation Takes Shape

David Song, Strategist

Talking Points:

- EUR/USD Resilience Persists on Low-Key Draghi, Threat of U.S. Government Shutdown.

- NZD/USD Weighed by Narrowing Growth Outlook; Head-and-Shoulders Formation Unfolds.

- Sign Up for the DailyFX Trading Webinarsfor an opportunity to discuss potential trade setups.

DailyFX Table

Ticker

Last

High

Low

Daily Change (pip)

Daily Range (pip)

EUR/USD

1.1813

1.1820

1.1740

51

80

EUR/USD clings to the narrow range from earlier this week as European Central Bank (ECB) President Mario Draghi highlights the success of the quantitative easing (QE) program, with the pair at risk of staging a larger advance amid growing concerns surrounding the U.S. fiscal outlook.

The shift in EUR/USD behavior may persist in the second-half of the year as the ECB appears to be on course to taper its asset-purchases ahead of the December deadline, but the appreciation in the single-currency may become a growing concern for the Governing Council as it dampens the outlook for inflation. In turn, the resilience in the Euro may be put to the test with the ECB staff scheduled to release its new updates at the next meeting on September 7.

In contrast, the uncertainty surrounding fiscal policy may undermine the Federal Open Market Committee’s (FOMC) scope to further normalize monetary policy as many officials ‘saw some likelihood that inflation might remain below 2 percent for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downside.’ Even though Fitch Ratings noted a government shutdown would not directly affect the AAA-rating, the agency warned it would have to review the U.S. sovereign debt rating if the debt limit is not addressed in a timely manner. As a result, FOMC officials may project a more shallow path for the fed funds rate especially as U.S. President Donald Trump pledges to terminate the North American Free Trade Agreement (NAFTA).

EUR/USD Daily Chart

EUR/USD Daily Chart

Chart - Created Using Trading View

  • Lack of momentum to break the monthly opening range undermines the scope for a bull-flag formation, with EUR/USD at risk of facing range-bound prices as the 1.1670 (50% retracement) region continues to offer support following the failed attempt to fill-in the gap from January-2015 (1.2000 down to 1.1955).
  • Nevertheless, the broader outlook remains constructive as both price and the Relative Strength Index (RSI) preserve the upward trends from late-2016, with the momentum indicator clearing the bearish formation from earlier this month.

Ticker

Last

High

Low

Daily Change (pip)

Daily Range (pip)

NZD/USD

0.7221

0.7283

0.7198

58

85

NZD/USD slips to a fresh monthly-low as the New Zealand government curbs its growth and budget forecast for the period throughout 2021.

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Expectations for slower growth may encourage the Reserve Bank of New Zealand (RBNZ) to preserve the record-low cash rate beyond Governor Graeme Wheeler’sdeparture in September, and the central bank may carry the wait-and-see approach into 2018 especially as ‘headline inflation is likely to decline in coming quarters.’ In turn, the New Zealand dollar may exhibit a more bearish behavior over the remainder of the year, with NZD/USD at risk of giving back the rebound from the 2017-low (06818) as a near-term reversal appears to be taking shape.

NZD/USD Daily Chart

NZD/USD Daily Chart

Chart - Created Using Trading View

  • Downside targets are back on the radar as NZD/USD initiates bearish sequence follow the string of failed attempts to push back above the former-resistance zone around 0.7330 (38.2% retracement) to 0.7350 (23.6% expansion).
  • Keeping a close eye on the July-low (0.7202) as it lines up with the Fibonacci overlap around 0.7190 (50% retracement) to 0.7200 (38.2% retracement), with the next downside region of interest coming in around 0.7100 (38.2% retracement) to 0.7110 (38.2% expansion) followed by the 0.7040 (50% retracement) region.

Retail Sentiment

Retail Sentiment

Track Retail Sentiment with the New Gauge Developed by DailyFX Based on Trader Positioning

  • Retail trader data shows 29.2% of traders are net-long EUR/USD with the ratio of traders short to long at 2.43 to 1. In fact, traders have remained net-short since April 18 when EUR/USD traded near 1.07646; price has moved 9.6% higher since then. The number of traders net-long is 14.8% lower than yesterday and 14.2% lower from last week, while the number of traders net-short is 7.3% higher than yesterday and 12.9% higher from last week.
  • Retail trader data shows 43.3% of traders are net-long NZD/USD with the ratio of traders short to long at 1.31 to 1. In fact, traders have remained net-short since May 24 when NZD/USD traded near 0.68301; price has moved 5.4% higher since then. The percentage of traders net-long is now its highest since May 24 when NZD/USD traded near 0.70427. The number of traders net-long is 17.3% higher than yesterday and 24.3% higher from last week, while the number of traders net-short is 13.0% lower than yesterday and 16.6% lower from last week.
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--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

To be added to David's e-mail distribution list, please follow this link.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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