The New Zealand Dollar (NZD) found itself under pressure on Wednesday, retreating towards the 0.6030 level against the US Dollar (USD). This movement reflects a complex interplay of investor sentiment driven by the recent US-China trade developments and the looming US Consumer Price Index (CPI) release, which is widely anticipated to impact market direction significantly. 

For a comprehensive understanding, see how the brokers at Servelius tackle the topic in this article.

Market Context: Disappointment on US-China Trade Deal

The initial optimism surrounding the US-China “framework” trade agreement has faded, with the market showing a muted response. US Commerce Secretary Howard Lutnick hailed the deal as a breakthrough, emphasizing lower tariffs and eased restrictions on the crucial rare earths trade, a sector vital to multiple industries.

However, this announcement failed to convince investors due to the lack of detailed implementation measures and skepticism about the deal’s long-term sustainability. Consequently, while the US Dollar initially strengthened post-announcement, those gains were largely erased as traders digested the implications.

The NZD/USD pair, sensitive to global trade sentiment and risk appetite, experienced a downward correction. The Kiwi’s retreat by approximately 0.35% was partly influenced by the softening US Dollar ahead of the critical US CPI data, which is expected to shed light on the inflation trajectory amid ongoing trade tensions.

US Dollar: Slight Gains but High Volatility Ahead of CPI

The US Dollar Index (DXY) has shown minor gains amid cautious positioning by market participants. Traders are acutely aware that the upcoming US CPI report could confirm persistent inflation pressures. 

This report is pivotal, as it might reflect the economic consequences of tariffs introduced during the US Administration’s so-called “Liberation Day,” which aimed to reshape global trade relations but also contributed to inflation concerns.

A higher-than-expected CPI reading could exacerbate fears of stagflation, a damaging combination of rising inflation and stagnant economic growth. This possibility has kept the market on edge, limiting USD’s upside but preventing significant declines.

Technical Analysis: Signs of Potential Trend Shift in NZD/USD

From a technical perspective, NZD/USD is showing multiple signals that hint at a potential trend reversal following the May-June rally.

• Evening Star Candle Formation:
  On the daily chart, an “Evening Star” candlestick pattern has emerged. This formation is a classic bearish reversal signal, indicating that upward momentum is waning and that sellers are gaining control.
• Potential Double Top at 0.6080:
  The pair appears to have formed a double top (DT) pattern around 0.6080, another negative sign signaling resistance and a potential end to the previous uptrend.
• Approaching Key Support Levels:
  NZD/USD is testing an ascending trendline support stemming from the May 23 lows at approximately 0.6025. This trendline is critical; a break below it would open the door for a deeper correction. Further support lies near the double top neckline at 0.6000. If the pair breaches this level decisively, it would confirm the trend shift and likely increase selling pressure.
• Fibonacci Retracement Target:
  Below these supports, attention shifts to the 0.5925 area, where the 61.8% Fibonacci retracement from the recent rally converges with the lows of May 28 and 29. This confluence of technical indicators could serve as a strong support zone for NZD/USD.

Upside Scenario: Key Resistance Levels to Watch

On the flip side, if NZD/USD manages to reclaim 0.6080 and break above this double top resistance, the bearish outlook would be invalidated. Such a move would likely clear the path towards the mid-October 2024 highs near 0.6120, restoring confidence in the Kiwi’s strength and possibly extending the rally.

Summary and Outlook

• The NZD/USD pair is currently in a vulnerable position, retreating towards 0.6030 amidst disappointing trade deal news and cautious sentiment before the US CPI release.
• The lack of substantive details in the US-China trade framework has tempered risk appetite, impacting the New Zealand Dollar negatively.
• The US Dollar is holding minor gains but remains volatile as investors await inflation data that could influence monetary policy expectations.
• Technically, NZD/USD shows early signs of a potential trend reversal through the Evening Star pattern and a possible double top, with crucial support levels at 0.6025 and 0.6000.
• A break below these supports could drive NZD/USD down to the 0.5925 Fibonacci level, while a recovery above 0.6080 would negate the bearish outlook and target the 0.6120 highs.

Traders should remain cautious in the short term, closely monitoring US CPI data and subsequent market reaction for clearer directional cues. The interplay between global trade negotiations and inflation dynamics will continue to shape the NZD/USD trajectory in the coming sessions.