NZD/USD consolidates in 0.6875 area after impressive, dollar weakness driven two-day run higher from under 0.6800

NZD/USD’s impressive rally since the start of the week continued on Thursday, though has in recent hours petered out in the 0.6875 area, with the bulls unable to force a test of the 0.6900 level. On the day, the pair trades about 0.4% higher, taking its on the week gains to about 1.5%, the best week for the pair since early October. Broad dollar weakness that on Thursday saw the dollar index drop to fresh two-month lows underneath the 95.00 level has been the principal driver of NZD/USD’s recent turnaround higher. Dollar weakness, which traders have said is being driven by a long-squeeze/bout of profit-taking, goes against recent fundamental developments that many would normally see as USD bullish.

Since last week’s hawkish Fed minutes release, which showed FOMC members were broadly on board with the idea of significant removal of monetary accommodation in 2022, the December unemployment rate was shown to have dropped under 4.0% and December inflation increased. Wednesday saw the release of the December Consumer Price Index which rose at a pace of 7.0% YoY, the highest since 1982, whilst the Producer Price Inflation report on Thursday showed factory-gate price growth reaching 9.7% YoY. The recent run of US data strongly supports the Fed’s new hawkish position that interest rates should be lifted this year and (perhaps) quantitative tightening kicked off.

Various Fed members have spoken public so far this week and all are on board with the notion that accommodation should be quite swiftly removed this year, with most also open to the idea of lift-off in March. Some have said they could support four rate hikes this year if warranted and this seems to now be the base case expectation of most major US banks and analysts. All of the above (hawkish Fed, strong jobs data, hot inflation) might typically be expected to boost the buck, but the opposite has occurred. Some FX strategists have argued the dollar weakness will be short-lived, while others have said it reflects concerns that the Fed might make a policy mistake by tightening too quickly and then having to postpone hike (meaning a lower terminal rate) at a later date.

If the latter camp is correct, NZD/USD recent rally to the upper 0.6800s may prove short-lived. But from a technical perspective, it is impressive how the pair has managed in the last two sessions to break above key levels of resistance. After breaking out of a short-term bearish trend channel on Wednesday that was holding it under 0.6800, NZD/USD has since rallied to multi-week highs above a key level of long-term support turned resistance in the 0.6860 area, as well as clearing the 50-day moving average at 0.6861. The recent bullish run suggests a medium-term change in trajectory for NZD/USD, with the door now open to a move into the 0.6900s and perhaps even a test of the big 0.7000 level.