Key Points:
- Price action trending within an ascending channel.
- RSI oscillator is showing divergence.
- Watch for the bullish channel to breakdown ahead of the FOMC vote.
The New Zealand Dollar has been a net beneficiary from the building uncertainty around the U.S. Federal Reserve’s forward path on rate hikes. Subsequently, the currency pair has rallied relatively strongly, within an ascending channel, over the past month to its current level at 0.7220. However, the upward momentum could be coming to an end as some interesting technical signals suggest a pullback could be on the cards in the coming days.
In particular, the 4-hour timeframe provides some illuminating clues as to what is potentially looming for the Kiwi Dollar. Currently, price action has reached some lofty heights above the 72 cent handle but the momentum has seemingly stalled and we are now moving in a sideways direction. However, this sideways movement is placing the lower extremity of the channel at risk of which a breach could commence a steady decline. Additionally, there are some signs of divergence between price action and the RSI Oscillator with the later currently trending lower despite price action moving sideways.
Subsequently, there are plenty of reasons to suggest that the Kiwi Dollar might be preparing for a break lower in the coming days. This is especially prescient given the fundamental risk event that is looming for the pair in the coming session with the FOMC getting ready to revisit their interest rate regime. Any hawkish moves by the central bank could lead to a significant downside momentum shift for the NZD and potentially see the currency pair slipping back below the 70 cent handle in the short term. Additionally, the RBNZ has already said that they view the Kiwi Dollar as overvalued and this adds plenty of credence to the view that the pair is ready for a decline.
Ultimately, the next few days are likely to be relatively critical for Kiwi Dollar with a range of downside risks, both fundamental and technical, looming on the horizon. Subsequently, the most likely scenario is price action breaking below the lower channel constraint at 0.7194 and moving steadily towards support around the 71 cent handle and possibly as low as 0.7050 in extension. Subsequently, it would pay to monitor price action in the coming hours because the move will be fairly rapid following the potential breakdown. However, watch for volatility around the FOMC decision because the very nature of central banking makes it highly unpredictable.
