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    NZD/USD: double bottom or bull trap?

    Understandably, the focus today is on the FOMC as traders await clues on the path of future policy from the Federal Reserve and what that might mean for the dollar. If the Fed opts to drop the word “patient” from its policy statement then this could give rise to speculation about a June rate hike. This would most likely give the dollar another shot in the arm, which could be bad news for the buck-denominated commodities and, in turn, commodity currencies. The opposite is also true; if the Fed sounds surprisingly dovish then the dollar bulls may choose to take profit and the buck could drop sharply as a result.

    So, a lot depends on the outcome of the FOMC meeting today. But for the NZD/USD traders, the action will not end there, for the New Zealand GDP comes in a few hours later at 21:45 GMT. The New Zealand economy is expected to have expanded 0.8% quarter-on-quarter in Q4 vs. 1.0% growth in Q3. The RBNZ has recently suggested that there will be a period of stability for interest rates, so should the GDP miss the mark by a big margin then the central bank may have to rethink that strategy. Yesterday saw the kiwi get battered after the GDT Price Index showed an 8.8% drop in dairy prices since the beginning of the month, ending a run of six straight increases in the index.  If commodity prices continue to fall and tonight’s GDP data disappoints expectations then speculation will undoubtedly grow that the RBNZ would have little choice but to lower interest rates at some point down the line. This will most likely weigh on the Kiwi.

    Given the abovementioned fundamental backdrop, the Kiwi could literally go in either direction tonight and the direction of the near term trend may become a lot clear. From a technical point of view, the bearish trend and the falling moving averages clearly suggest that the trend is still bearish. What’s more, price is continuing to make lower highs with the most recent highs being formed around the old support levels of 0.7610 and 0.7440 respectively. However, the most recent low, at 0.7190, was a touch higher than the prior low of 0.7175, which thus suggests price may have formed a base. For this potential double bottom reversal pattern to come to fruition, the NZD/USD will still need to break the bearish trend line and make a higher high above the 0.7610 level. But in the near term if it breaks the 0.7440 resistance level then that could be a major warning sign for the bears. Meanwhile a decisive break below 0.7190 would invalidate this potentially bullish scenario. In this case price could drop a lot lower before making its next move.

    Figure 1: 

    Source: FOREX.com

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