The New Zealand dollar has been correcting lower on the foreign exchange market against the US dollar last week, due to a double whammy of a stock market correction and a recovery in the greenback against most commodity currencies.
Much of the losses in commodity-related currencies have been down to fears over the new Omicron variant in China, which has the potential to cause more dent economic growth and the supply chain.
Commodity demand is a big factor for the New Zealand dollar, hence, if we see the Chinese economy slowing, it typically starts to hurt the NZDUSD pair on the foreign exchange market.
Another big factor is the US dollar currency. Recent comments from FED Chair Powell suggest that the central bank are going to raise rates in May by 50 basis points to fight inflation.
On the technical front, the NZDUSD pair has recently rallied towards the 0.700 level. This is good news on the technical front and opens up medium-term potential, however, over the short-term a deeper correction could happen.
Technical analysis highlights that the NZDUSD pair could drop below the 0.6080 level over the coming days and weeks, following the break down below the 0.690 support zone.
According to the ActivTrader market sentiment tool some 68 percent of traders are bullish towards the NZDUSD pair. As we typically look to fade sentiment biases, this could mean the NZDUSD pair could test much lower.
It is worth mentioning that high levels of bullish sentiment suggest a classic contrarian sentiment trade is still in the making, so do be careful buying this pair, especially with technical analysis pointing towards 0.6800 to 0.6700 area.
NZDUSD Short-Term Technical Analysis
The four-hour time frame shows that a large rising wedge type price pattern has formed. Typically this is not a good sign for bulls, as these are strong bearish reversal patterns.
If the pattern is correct then a decline back to the 0.6800 region seems plausible. If a recovery takes hold, then a rally towards the 0.7200 resistance level is more likely in the medium-term.
NZDUSD Medium-Term Technical Analysis
The daily time frame shows that the pair is falling towards the neckline of large, inverted head and shoulders pattern. These types of patterns are typically considered to be classic bullish reversal pattern.
According to technical analysis a final right-hand shoulder seems more likely than while the NZDUSD pair trades under the 0.6880 level. Buying a restest of the 0.6800 or 0.6700 area appears the best strategy for the bulls.