The NZDUSD continued its descent yesterday, retesting last week’s low at 0.7133. This comes after the pair was capped by the 0.7240 handle last week.
I’m not interested in trading the pair while above 0.7133. However, a daily close below it could present an opportunity to go short. Such a break would open the door for a move to the next support level at 0.7040.
But just like the EURUSD that I mentioned yesterday, the NZDUSD has become a bit overstretched. With this in mind, I wouldn’t be surprised to see the pair continue to consolidate between 0.7133 and 0.7240 before the next leg begins.
As for the direction of the next move, that will depend heavily on the outcome of the U.S. dollar index (DXY). There is some speculation that a three-month head and shoulders reversal has developed but that pattern has yet to be confirmed.
The DXY will likely need a daily close above the 102.00 handle to diminish the odds of a bearish reversal. And a move back toward the multi-year highs at 103.50 would negate the formation entirely.
On the flip side, a daily close below 99.45 would confirm the speculative bearish formation.
Note that the correlation between the NZDUSD and the DXY has been known to weaken at times, but at the moment stands at +92% on a daily closing basis.
My initial assessment is that this is not a head and shoulders pattern. The angle of the descending channel that formed last month in comparison to the mid-December rally doesn’t appear to suggest an overly weak market.
But as with every price structure, I’ll let the market do the talking.
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