Fed’s Powell Rattled NZD/USD Bears, Igniting Short-Covering Rally

The New Zealand Dollar is trading nearly flat early Thursday as traders continue to digest the Federal Reserve’s monetary policy statement and less-hawkish comments from Fed Chair Jerome Powell, while bearish traders lick their wounds following a massive short-covering rally on Wednesday.

At 03:29 GMT, the NZD/USD is trading .6545, down 0.0002 or -0.03%.

The Kiwi finished sharply higher on Wednesday after the Federal Reserve delivered a widely expected interest rate-hike. The Fed raised its benchmark overnight interest rate by half a percentage point and said it would begin shrinking the central bank’s $9 trillion asset portfolio next month in an effort to further lower inflation.

Shorts Got Spooked by Powell’s Remarks

New Dollar traders were relieved by the moves by the Fed because it delivered as promised. This was enough to stabilize the currency. However, short-sellers were spooked by less-hawkish comments from Fed Chair Jerome Powell, fueling an impressive short-covering rally that drove the Kiwi 1.7% higher on Wednesday, its largest one-day rise in two years.

Powell rattled the Kiwi bears by indicating that the central bank won’t get even more aggressive in raising rates.

“A 75-basis-point increase is not something we’re actively considering,” Powell said. “I would say I think we have a good chance to have a soft or softish landing, or outcome if you will.”

Daily Swing Chart Technical Analysis

The main trend is down according to the daily swing chart. However, momentum has been trending higher since the formation of the daily closing price reversal bottom on May 3.

A trade through .6411 will negate the chart pattern and signal a resumption of the downtrend. A move through .6902 will change the main trend to up, but bullish traders have to claw through a number of retracement levels before the NZD/USD gets there.

The minor trend is also down. A trade through .6646 will change the minor trend to up. This will confirm the shift in momentum.

Currently, the NZD/USD is trading on the strong side of a pair of 50% levels at .6529 and .6467, making them support.

On the upside, the next pivot price resistance is a pair of 50% levels at .6614 and .6658.

The major upside target and resistance zone is .6724 to .6797.

Daily Swing Chart Technical Forecast

The direction of the NZD/USD early Thursday is likely to be determined by trader reaction to the minor pivot at .6529.

Bullish Scenario

A sustained move over .6529 will indicate the presence of buyers. If this move creates enough upside momentum then look for a labored rally into a minor pivot at .6614, followed by a minor top at .6646 and another minor pivot at .6658.

Over taking .6658 will indicate the short-covering is getting stronger. This could lead to a further rally into the major retracement zone at .6724 to .6797.

Bearish Scenario

A sustained move under .6529 will signal the presence of sellers. If this move generates enough downside momentum then look for the selling to possibly continue into a 50% level at .6467. If this fails then look for a retest of the main bottom at .6411.

Side Notes

The first rally from any major bottom is short-covering. If buyers are going to show up, it will likely be on a 50% to 61.8% retracement of the first short-covering rally.

Wednesday’s rally while impressive, did not change the trend to up, but it did green light a possible rally. The decision for bullish traders at this time is to chance the NZD/USD higher or play for a pullback into a new higher bottom.

Remember, the trend is down so sellers are going to try to form new secondary lower tops, while countertrend buyers will be looking to form new secondary higher bottoms. Whoever wins these battles, wins the trend.