The Reserve Bank of New Zealand (RBNZ) has decided to keep its key rate unchanged at 5.5%, the highest it has been in 15 years. This decision was in line with market expectations, but it sparked a rally in the NZD/USD currency pair. The NZD/USD soared by over 1.2% at one point, reaching a four-month high of 0.6200.
The surge in the NZD/USD was influenced by the RBNZ’s vocal readiness to raise rates if necessary. The central bank’s rate forecasts became more hawkish, indicating a willingness to take action. The committee revised its August forecast, expecting a higher rate in a year than what is currently projected, aligning with the bank’s higher for longer mantra.
However, the dynamics of the New Zealand dollar suddenly changed later in the day. During morning trading in Europe, NZD/USD erased all its gains following the RBNZ’s announcement and pulled back to 0.6150. This sell-off appears to be a case of profit-taking after the NZD/USD rallied by 5.8% in the past two weeks, driven by a weak US inflation report. Sellers emerged once the NZD/USD entered the overbought area on the daily charts’ Relative Strength Index (RSI).
When looking at higher timeframes, the NZD/USD almost reached the upper boundary of a descending corridor that it has mostly followed since March 2021. Throughout the year, the pair has frequently traded near the lower boundary, with significant reversals occurring when approaching the upper boundary.
Historically, it has taken around 5-6 weeks for NZD/USD to move from the upper boundary to the lower boundary within this channel. If this pattern repeats for the sixth time, we could see the NZD/USD drop to the 0.5750 level by early January.
However, an alternative bullish scenario may gain traction if the NZD/USD can maintain its short-term growth momentum and surpass the previous local top at 0.6400.
As always, market movements are subject to various factors and should be carefully monitored by investors and traders.
Source: Investing.com