NZDUSD has formed a double top pattern on its 4-hour chart, signaling that a reversal from the previous uptrend might take place. Price just broke below the neckline around the .6800 major psychological level, which confirms that the downtrend is starting.
However, technical indicators are hinting at a possible bounce. Stochastic is already indicating oversold conditions and is starting to turn higher, suggesting that profit-taking could happen and allow a pullback to the broken neckline. Similarly, RSi is in the oversold area so sellers might need to take a break.
In addition, the 100 SMA is still above the longer-term 200 SMA so the path of least resistance is to the upside. The gap between the moving averages is narrowing, though, so a downward crossover might be possible.
Remarks from New Zealand Finance Minister Bill English suggested that the RBNZ might pursue a rate cut in their June statement. He acknowledged the rise in Auckland house prices, hinting that the central bank might make some adjustments in their loan-to-value ratio controls or other macro-prudential measures to curb housing inflation.
This mirrors a similar scenario last year during which the central bank put housing market measures in place first before announcing a rate cut soon after. With that, traders are awaiting the Financial Stability Report from the RBNZ to see if actual tools will be employed.
Another event risk for this setup is the quarterly retail sales report due on Thursday. Headline retail sales could post a 1.0% gain, slower than the earlier 1.2% increase, while core retail sales could post a 1.1% increase. As for the dollar, retail sales and PPI releases on Friday could add to volatility.
By Kate Curtis from Trader’s Way