The NZD/USD exchange rate continued its strong rally last week, reaching its highest level since June last year. It has now soared in the last five consecutive weeks as investors anticipated a potential divergence between the Federal Reserve and the Reserve Bank of New Zealand (RBNZ).
RBNZ interest rate decision
The NZD/USD exchange rate will be in the spotlight this week as the RBNZ delivers its monetary policy decision on Wednesday. Economists polled by Reuters expect that Anna Breman, the new head of the bank, will leave interest rates unchanged at 2.25%.
Additionally, economists believe that the bank will tweak the monetary policy statement and hint that it will deliver a rate hike later this year. In its last meeting, the committee hinted that the bank will leave rates unchanged for the rest of the year.
The most recent report showed that New Zealand is still battling a cost-of-living crisis, with the headline consumer price index (CPI) rising to 3.1% in the fourth quarter from 3% in Q3. It has been in an uptrend as it started last year at 2.5%.
Core inflation, which excludes the volatile food and energy products, rose to 3.2% in Q4 from 3.1% in the previous quarter. This trend mirrors that of Australia, which has held steady in the past few months, pushing the RBA to hike interest rates.
The challenge for the RBNZ is that the unemployment rate is moving in the wrong direction. It jumped to 5.4% in the fourth quarter, the highest level since 2015. The unemployed people jumped by 5,000 to 165,000.
Therefore, the bank believes that leaving rates at the current level is balanced. Hiking rates to fight inflation will lead to higher unemployment rate, while lowering rates may stimulate more inflation.
On the positive side, inflation may start coming down because of the strong kiwi since it is mostly driven by higher import prices.
FOMC minutes ahead
The NZD/USD exchange rate will also react to the upcoming Fed minutes, which will come out on Wednesday. These minutes will provide more information on what officials deliberated in the last meeting in which they decided to leave rates unchanged.
They will come a few days after the US publishes the January jobs and inflation report. A report by the Bureau of Labor Statistics (BLS) showed that the economy added over 130k jobs in January.
Another report revealed that the headline Consumer Price Index (CPI) slowed to 2.4% in January from the previous 2.6%. That report raised the possibility that the Fed will deliver more cuts this year than expected, leading to a divergence with the RBNZ.
NZD/USD technical analysis
NZDUSD chart | Source: TradingView
The weekly timeframe chart shows that the NZD to USD pair has rebounded in the past few months, moving from a low of 0.5576 in December to the current 0.6040. This rebound happened after the pair formed a double-bottom pattern whose neckline is at 0.6116, its highest point in July.
The pair has moved above the 50-week Exponential Moving Average (EMA), a sign that bulls remain in control. Also, the Relative Strength Index (RSI) and the MACD have continued rising.
Therefore, the most likely scenario is where the pair continues rising, with the next key level being the neckline at 0.6116. A move above that level will point to more gains, potentially to the psychological level at 0.6200.
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