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NZD/USD Attempts to Negate Head-and-Shoulders Pattern Ahead of NZ CPI

NZD/USD Attempts to Negate Head-and-Shoulders Pattern Ahead of NZ CPI

David Song, Strategist

New Zealand Dollar Talking Points

NZD/USD trades to a fresh monthly high (0.7230) ahead of the update to New Zealand’s Consumer Price Index (CPI), with the exchange rate on track to negate the head-and-shoulders formation from earlier this year as it approaches the March high (0.7307).

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NZD/USD Attempts to Negate Head-and-Shoulders Pattern Ahead of NZ CPI

NZD/USD climbs back above the 50-Day SMA (0.7152)after defending the March low (0.6943), and the decline from the yearly high (0.7465) may turn out to be a correction in the broader trend rather than a key reversal as the exchange rate trades back above the neckline.

Image of DailyFX economic calendar for New Zealand

It remains to be seen if the update to New Zealand’s CPI will influence the near-term outlook for NZD/USD as the headline reading for inflation is expected to hold steady at 1.4% for the third consecutive quarter, and signs of subdued price growth may produce a bearish reaction in the New Zealand Dollar as the Reserve Bank of New Zealand (RBNZ) pledges to “maintain its current stimulatory monetary settings until it is confident that consumer price inflation will be sustained at the 2 percent per annum target midpoint.”

At the same time, an above forecast CPI print may push NZD/USD to fresh monthly highs as the RBNZ sees a “risk that higher headline inflation, if sustained, may feed into higher inflationary expectations,” and the central bank may adopt a less dovish tone at its next meeting on May 26 as “the risks to the economic outlook remain balanced.”

Until then, NZD/USD may attempt to break out of the March range as it appears to be on track to negate the head-and-shoulders formation from earlier this year, with the recent flip in retail sentiment largely dissipating as the crowding behavior from 2020 resurfaces.

Image of IG Client Sentiment for NZD/USD rate

The IG Client Sentiment report shows only 35.58% of traders are net-long NZD/USD, with the ratio of traders short to long currently standing at 1.81 to 1.

The number of traders net-long is 21.36% lower from last week, while the number of traders net-short is4.97% lower from last week. The decline in net-long interest could be a function of profit taking behavior as NZD/USD trades to a fresh monthly high (0.7230), while the decline in net-short interest has done little to offset the tilt in retail sentiment as 40.84% of traders were net-long the pair during the previous week.

With that said, the decline from the yearly high (0.7465) may turn out to be a correction in the broader trend rather than a key reversal as the crowding behavior from 2020 resurfaces, and NZD/USD appears to be on track to negate the head-and-shoulders formation from earlier this year as it approaches the March high (0.7307).

NZD/USD Rate Daily Chart

Image of NZD/USD rate daily chart

Source: Trading View

  • A head-and-shoulders formation has materialized in 2021 as NZD/USD slipped below the 50-Day SMA (0.7152) for the first time November, but the decline from the yearly high (0.7465) may turn out to be a correction in the broader trend rather than a key reversal as the exchange rate climbs back above the neckline.
  • The Relative Strength Index (RSI) highlights a similar dynamic as it reversed ahead of oversold territory to break out of the downward trend from earlier this year, with the break/close above the 0.7070 (61.8% expansion) to 0.7110 (38.2% expansion) area pushing NZD/USD back above the 50-Day SMA (0.7152).
  • In turn, the 0.7260 (78.6% expansion) zone sits on the radar as NZD/USD climbs to fresh monthly highs, with the next area of interest coming in around 0.7320 (23.6% expansion) to 0.7350 (23.6% expansion) followed by the 0.7450 (38.2% expansion) to 0.7500 (100% expansion) region, which largely lines up with the February high (0.7465).

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

https://www.dailyfx.com/sentiment?ref-author=Song

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

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