The NZD/USD exchange rate has struggled to gain traction in 2024, weighed down by New Zealand’s recession, China’s economic slowdown, and the strength of the US economy. However, recent indicators of recovery, including improved domestic data and rising dairy prices, are sparking hopes of a turnaround for the Kiwi. Despite this, the next big move for NZD/USD hinges on the Federal Reserve’s rate outlook.
Persistent Pressure on NZD/USD
The challenges for the New Zealand dollar have been no secret. New Zealand’s economic struggles, coupled with China’s ongoing slowdown, have kept the Kiwi on the defensive. At the same time, the United States economy has maintained strong momentum, supported by stable inflation and low unemployment, limiting the likelihood of aggressive Fed rate cuts.
This divergence has left the NZD/USD pair grounded, earning its nickname as the “flightless bird” among traders. However, with the market already pricing in these known challenges, any signs of convergence between the New Zealand and US economies could quickly trigger a reversal, especially given the pair’s oversold levels.
Signs of Recovery Emerging
Encouragingly, signs of improvement in New Zealand’s economy are starting to surface. The Bank of New Zealand Performance of Services Index (PSI) rose to 49.5 in November, up from 46.2 in October. While still signaling a contraction, this uptick highlights a narrowing gap between New Zealand’s service sector and that of other developed economies.
In addition, a strong rebound in dairy prices, New Zealand’s most valuable export, has provided further support. Despite robust US economic data, the NZD/USD pair was among the top-performing currencies during a recent trading session, indicating growing optimism about the Kiwi’s outlook.
Technical Signals Point to Potential Bottom
From a technical perspective, NZD/USD is showing signs of a potential bottom. On the daily chart, a three-candle morning star pattern a classic reversal signal has emerged, reinforcing bullish hopes. The pair also appears to be forming a falling wedge, a pattern often associated with trend reversals.
The recent bounce off support following a failed downside breakout adds to the bullish case. However, momentum indicators like the RSI and MACD remain subdued, suggesting that caution is still warranted.
For traders looking to capitalize on this setup, a potential strategy could involve entering near current levels with a stop-loss below Friday’s low. Key resistance levels to watch include 0.5800 and the falling wedge resistance around 0.5850. A sustained push above 0.6200 could open the door for further gains toward 0.5888 and 0.5929. Conversely, a break below Friday’s low would invalidate the bullish bias.
Fed Decision Holds the Key
The upcoming Federal Reserve FOMC meeting is the critical event that will dictate the next major move for NZD/USD. While markets widely expect a 25 basis point rate cut, the focus will be on the Fed’s projections for interest rates in 2025.
Currently, the market anticipates two cuts next year, down from the four suggested by the Fed three months ago. If the Fed signals a more dovish path with three or more cuts, the US dollar could weaken, boosting NZD/USD. On the other hand, a hawkish stance signaling only one cut would likely strengthen the dollar, putting further pressure on the Kiwi.
Another key metric to watch is the neutral rate projection the theoretical level where interest rates neither stimulate nor restrain growth. In September, the Fed pegged this rate at 2.9%. A move to 3% could provide relief to risk assets, but any projection above 3.2% would signal a “higher for longer” rate outlook, further supporting USD strength.
Conclusion
While NZD/USD remains under pressure, improving domestic data and technical signals suggest the Kiwi may be nearing a turning point. However, the Fed’s rate decision and outlook remain the ultimate drivers of near-term direction. Traders should watch key resistance levels and remain cautious as the market prepares for the Fed’s pivotal announcement.
