NZD/USD head and shoulders pattern hints to a bearish breakout

Written by: Crispus Nyaga
April 21, 2021
  • The NZD/USD pair rose slightly after the latest New Zealand inflation data.
  • The pair has formed a head and shoulders pattern on the 4H chart.
  • This is a signal that it will likely break out lower.

The NZD/USD tilted higher on Wednesday as forex traders reacted to the relatively stronger New Zealand consumer inflation data. The pair is trading at 0.7185, which is slightly above this week’s low at 0.7158.

NZD/USD
NZD/USD price action

New Zealand inflation data

The coronavirus response in New Zealand was a success. The country lost just 25 people, making its response one of the best in the world. The economy also performed relatively better than other related countries like Australia and the UK.

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This recovery is gaining momentum as evidenced by the first quarter inflation numbers. According to Statistics New Zealand, the headline consumer price index rose from 0.5% in the fourth quarter of 2020 to 0.8% in the first quarter. This number was better than the median estimate of 0.7%. This increase led to a year-on-year rise of 1.5%, which was better than the previous 1.4%.

According to the statistics bureau, this increase was because of the transportation sector, whose price rose by 3.9%. This was the biggest quarterly increase in more than 10 years. Further, the price of petrol rose by 7.2%, the sharpest increase in more than 5 years. This was primarily due to the recent rally of crude oil prices. 

Other contributors of New Zealand inflation were housing costs, new and used cars, and mortgages. On the other hand, the laggards were electronics and furniture prices. 

Still, the headline and core consumer prices are below the target of the Reserve Bank of New Zealand (RBNZ) of 2.0%. Nonetheless, the trend will likely continue as the country continues its recovery process. Some sectors like hotels and tourism destinations will also see robust prices as the country starts to reopen its borders.

The strong New Zealand inflation is a positive thing for the NZD/USD pair because it could influence the RBNZ to turn hawkish.

NZD/USD technical forecast

New Zealand dollar
New Zealand dollar chart

The NZD/USD pair is bouncing back after the latest New Zealand inflation numbers. On the four-hour chart, it is slightly below the 50% Fibonacci retracement level. It has also moved slightly above the 15-day moving average. The price is also between the upper and middle lines of the Bollinger Bands. Notably, it has formed a head and shoulders pattern, which is a bearish signal. Therefore, the pair may soon break out lower as bears target the 61.8% retracement at 0.7140.