NZD/USD: forecast following a weeklong climb

The NZD/USD rallied all week until it found some resistance in the 0.70 area. So how do we interpret the technical picture?

The New Zealand dollar became one of the strongest currencies after the US Federal Reserve raised the interest rate. Curiously, instead of the US dollar appreciating, the New Zealand dollar did.

For example, the NZD/USD currency pair rose from 0.6745 on the day of the Fed's announcement to almost 0.70, in a near straight line. So what can we expect now?

Reverse head and shoulders pattern suggests more upside in the cards
The market has recently formed an inverted head and shoulders pattern from a technical analysis perspective. Its measured movement suggests more upside, with 0.7145 the minimum distance the market should go.

NZD and AUD decoupled from other peers
It is not only the New Zealand dollar, but also the Australian dollar, that has appreciated against the greenback. Other currencies, such as the euro or the pound sterling, lost ground to the almighty US dollar.

One explanation could be that the two countries down under, Australia and New Zealand, are far from the Russian-Ukrainian conflict that recently spooked Europe and the financial markets. Another is that inflation, while rising in Australia and the US, has not reached such high levels as in the US.

Inflation is higher in the US
Speaking of US inflation, the Federal Reserve decided it was time to raise the federal funds rate in response to a much higher than expected rise in the prices of goods and services. The problem is that the Fed only raised the rate by 25 basis points while US inflation is running at 7.8% year-on-year.

In other words, the rate hike does not make much difference in real terms. Thus, investors preferred to shift their investments to other places where inflation was lower and away from the conflict zone in Europe.

Overall, the Kiwi dollar, as the New Zealand dollar is also known, remains bid above 0.6845. Furthermore, the rally could take on another dimension if the NZD/USD pair closes the trading week above 0.70.