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NZD/USD Risks Larger Recovery on Dovish FOMC Rate Hike

NZD/USD Risks Larger Recovery on Dovish FOMC Rate Hike

2017-12-12 16:00:00
David Song, Strategist

Talking Points:

- NZD/USD Breaks Monthly Opening Range; Dovish Fed Rate-Hike to Fuel Larger Recovery.

- More Detailed ECB Exit Strategy to Curb EUR/USD Losses.

DailyFX TableNZD/USD

NZD/USD breaks the monthly opening range following Adrian Orr’s appointment to the Reserve Bank of New Zealand (RBNZ), with the pair at risk of staging a more meaningful recovery should the Federal Open Market Committee (FOMC) deliver a dovish rate-hike at its last meeting for 2017.

Fed Fund Futures

Keep in mind, Fed Fund Futures continue to highlight overwhelming expectations for a 25bp rise in the benchmark interest rate, and market participants are likely to pay increased attention to the fresh forecasts from Chair Janet Yellen and Co. amid the upcoming rotation in 2018. With Governor Jerome Powell taking the helm in February, the FOMC may stay on its current path of implementing three rate-hikes per year as officials anticipate ‘economic conditions would evolve in a manner that would warrant gradual increases in the federal funds rate.’

FOMC Interest Rate Forecast

However, the FOMC may strike a more cautious tone as ‘many participants observed that there was some likelihood that inflation might remain below 2 percent for longer than they currently expected,’ and a downward revision in the longer-run interest rate forecast is likely to produce headwinds for the greenback as the central bank faces a growing risk of completing its hiking-cycle ahead of schedule. Varying market conditions require alternative strategies as trends change. New to the currency market? Want a better understanding of the different approaches for trading? Start by downloading and reviewing the FREE DailyFX Beginners guide!

NZD/USD Daily Chart

NZD/USD Daily Chart
  • Near-term outlook for NZD/USD remains supportive as it carves a fresh series of higher highs & lows, with a break/close above the 0.6940 (61.8% expansion) to 06950 (38.2% retracement) region raising the risk for a move back towards 0.6990 (50% expansion), which largely lines up with the November-high (0.6980).
  • Keeping a close eye on the Relative Strength Index (RSI) as it extends the bullish formation carried over from the previous month and comes up against trendline resistance, with the next topside target coming in around 0.7040 (50% retracement) followed by the 0.7110 (38.2% expansion) region.

EUR/USD stands at risk for further losses as the European Central Bank (ECB) is widely expected to carry the zero-interest rate policy (ZIRP) into 2018, but the fresh batch of central bank rhetoric may heighten the appeal of the single-currency should President Mario Draghi and Co. lay out a more detailed exit strategy.

The Governing Council appears to be in no rush to move away from its easing cycle as measures of underlying inflation ‘have yet to show more convincing signs of a sustained upward trend,’ and more of the same from central bank officials may spark a bearish reaction in the Euro amid the ongoing expansion in the ECB’s balance sheet.

However, President Draghi and Co. may have little choice but to prepare European households and businesses for a less accommodative stance as the central bank plans to reduce its asset-purchases to EUR 30B/month starting in January, and ECB officials may offer a more detailed exit strategy as ‘members agreed that recent indicators had provided further confirmation of increasingly robust and broad-based growth, and had again been generally stronger than expected.’ Interested in watching the market reaction to the ECB meeting? Sign up and join DailyFX Currency Strategist Christopher Vecchio LIVE to cover the last interest rate decision for 2017.

EUR/USD Daily Chart

EUR/USD Daily Chart
  • Downside targets are coming back on the radar for EUR/USD following the failed attempt to break/close above 1.1960 (38.2% retracement) hurdle, with the pair at risk for further losses as it struggles to hold above the former-resistance zone around 1.1810 (61.8% retracement) to 1.1860 (161.8% expansion).
  • May see EUR/USD exhibit a more bearish behavior as the Relative Strength Index (RSI) snaps the upward trend carried over from the previous month, with the next downside region of interest coming in around 1.1670 (50% retracement) followed by 1.1580 (100% expansion), which sits above the November-low (1.1554)
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--- Written by David Song, Currency Analyst

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