Today’s US Consumer Price Index reading at 13:30 GMT will be closely watched by market participants. The headline CPI figure is expected to show a reading of -0.6% for January, which, if correct, would move the year-on-year rate to just below zero and thus into deflation. The core CPI however is seen edging up 0.1% month-over-month after a flat reading in December. This would leave the year-over-year CPI steady at 1.6%. If the actual numbers deviate from these expected readings by a significant amount then the dollar’s reaction should likewise be significant as it would undoubtedly impact expectations about the time of the first Fed rate hike. With so much talk about the collapse in oil prices, the risks are that the CPI data may actually surprise to the upside and thus cause the dollar to surge. The opposite is of course also true, which is why the FX market is relatively calm this minting. But it could be the calm before the storm, so it is best to be prepared for such a possibility.
In any case, we, in line with the consensus, think that the US Federal Reserve will increase interest rates at some point around mid-2015. We are therefore still bullish on the dollar – especially against currencies where the central bank is still, or turning, dovish. This makes us particularly bearish on the EUR/USD. However this currency pair has been stuck in a range for a long time now and it could be long before it starts moving lower again. Alternatively, the USD’s potential strength today could be played against a commodity currency such as the New Zealand dollar as gold and oil test key resistance levels.
One of the reasons why we are looking at the NZD/USD today is because it is also approaching some key levels where the probability of price turning is high from a technical point of view. In fact, the Kiwi is currently testing one such level at 0.7610/5. As can be seen from the chart, several technical factors or indicators come together here. First and foremost this level was previously support and so could turn into resistance now. On top of this, there are two Fibonacci levels meeting at this juncture: the 61.8% retracement of the last downswing (from point X to A) and the 127.2% extension of the move down from last week’s high (i.e. from point B to C). In addition, the 50-day moving average is being tested at 0.7585. Although price is currently above this SMA, there is a long way to go until today’s session is over. Thus, the Kiwi could turn red by the close of play and thus display a reversal pattern such as bearish engulfing or inverted hammer candle on its daily chart. If seen, the NZD/USD may then go on to push further lower on Friday and potentially in early parts of next week. To do that it will have to break supports at 0.7550 and then 100 pips lower at 0.7450. These levels were previously resistance.
Meanwhile if the NZD/USD manages to break above the 0.7610/15 area, say as a result of a weaker-than-expected US CPI reading, then the rally could extend towards the 0.7665-0.7705 area. The lower end of this range corresponds with the 161.8% extension level of the BC swing, while the upper end is the 100-day SMA. In-between these levels is the long-term bearish trend – the precise location of which depends on how fast price will get there, if it does at all. Needless to say, a potential break above that 0.7665-0.7705 area would end any short-term bearish technical setup. In that case the rally could extend towards the prior highs around 0.7880 and potentially beyond.