Following theRBNZ cutting its Official Cash Rate (OCR) by 50 basis points(bps) in November 2024, economists and investors expectanother bumper 50 bp rate reduction on Wednesday this week – with an outsidechance of a more minor 25 bp reduction. A 50 bp (25 bp) adjustment would bringthe OCR to 3.75% (4.00%). In addition, markets are also expectinganother 75 bps worth of cuts this year.

Sluggish Economic Activity

I’ve observed little reason to stray from market pricing and expect anadditional 50 bp cut this week. Gross Domestic Product (GDP) growth fell into atechnical recession in Q3 24 after printing a second consecutive quarter innegative territory; the -1.5% contraction was the lowest figure since Q2 20.Additionally, unemployment has risen to its highest level since late 2020 at5.1% (Q4 24), and given inflation remains within the RBNZ’s 1-3% target band –Q4 24 inflation increased to 2.2% (matching the 2.2% print in Q3 24) – thecentral bank has ‘room’ to lower the OCR.

With a 50 bp cut largely baked in, and assuming the central bank followsthrough, I expect a knee-jerk sell-off across New Zealand dollar (NZD) pairs. Thatsaid, most focus will be on any change in the rate statement’s language, pressconference commentary, and any revisions in the updated economic projections.

NZD/USD Vulnerable to the Downside

Price action on the monthly timeframe for the NZD/USD (New Zealanddollar versus the US dollar) came within a stone’s throw of testing long-termsupport from US$0.5511 this month. Anyone following candlestick patterns maynote that the current monthly candle is poised to close by way of a bullishengulfing formation. While monthly support is clear, and the bullish engulfingpattern indicates buyers may want to explore higher terrain, the rebound inOctober 2022 failing to print a meaningful high may concern long-term bulls.Couple this with the overall long-term trend facing south, and any higherrebound could be short-lived.

This brings me to the daily timeframe’s structure. Friday wrapped uppencilling in a dominant higher high (US$0.5738), reaching levels not seensince December 2024. What I also find interesting is although we have a higherhigh, this move represents a possible D-leg to an equal AB=CD resistancebetween a 200% extension ratio of US$0.5804 and horizontal resistance atUS$0.5774, along with a 100% projection ratio (the equal AB=CD structure) atUS$0.5789 nestled within the zone.

Consequently, although monthly price is testing a support area, my basecase is that the path of least resistance remains to the downside for theNZD/USD. Daily resistance between US$0.5804 and US$0.5774, therefore, will beon my watchlist this week.

Chart created using TradingView

Writtenby FP Markets Market Analyst Aaron Hill

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