"Head and Shoulders Bottom" Pattern Intact Despite Significant Retracement

Economic

Forex

Summary:

New Zealand's manufacturing index continues to contract, but new orders show signs of recovery. The New Zealand economy could face challenges due to US trade policies.

BUY EURNZD

Close Time

CLOSED

1.80170

Entry Price

1.84400

1.78100

2.01762 -0.00110 -0.05%

207.0

Pips

Loss

1.78100

1.78098

Exit Price

1.80170

Entry Price

1.84400

Fundamentals

New Zealand's BusinessNZ Performance of Manufacturing Index dropped from 47.0 to 45.8, marking its lowest point since July and extending the sector's contraction for a 20th straight month. The reading underscores continued struggles in the manufacturing sector, despite recent Reserve Bank of New Zealand (RBNZ) rate cuts.

The latest RBNZ survey shows a significant drop in one-year inflation expectations, down 35 basis points from 2.40% to 2.05%, continuing the steady decline since Q2 2023. On the other hand, two-year inflation expectations slightly rose from 2.03% to 2.12%.

Wage inflation expectations have also shown a mixed trend. One-year-ahead expectations dropped by 7 basis points to 2.81%, while two-year projections rose from 2.86% to 3.16%.

Growth expectations improved. The mean one-year-ahead GDP growth expectation jumped by 61 basis points to 1.60%, with a smaller increase of 7 basis points for two-year growth expectations to 2.17%.

On the interest rate front, the survey points to further monetary easing ahead. The Official Cash Rate (OCR) is expected to be 4.20% by the end of Q4 2024, with a sharper decline to 3.33% anticipated by Q3 2025. The OCR is currently at 4.75% following a recent 50bps cut in October.

Market Outlook: New Zealand's economic growth next year could face headwinds from President-elect Donald Trump's potential trade policies. Trump's re-election could significantly impact developed economies like New Zealand, especially those with close trade ties to the US.

Trump's past policies, particularly trade policies, have demonstrated potential to disrupt economies. Some of his current proposals could trigger inflation, forcing the Fed to halt its easing policies or even reverse them. This, in turn, could compel the RBNZ and other central banks to slow down their easing measures or raise interest rates to combat inflation.

Such actions would increase borrowing costs, potentially suppress economic growth and heighten economic uncertainty. In this scenario, consumer spending and business investment would likely be affected, hindering economic growth prospects for 2025.

"Head and Shoulders Bottom" Pattern Intact Despite Significant Retracement_1

Technical Analysis

EURNZD has experienced a sharp retracement since October 31, temporarily shaking market confidence in the bullish trend. However, the retracement failed to breach the critical "right shoulder" level of the "head and shoulders bottom" pattern, keeping the bullish structure intact.

Recent price action suggests a secondary bottom, with bulls eyeing a retest of the neckline resistance at 1.8028. A breakout above this level would solidify the pattern's transition and open the door for further gains, targeting the 1.8440 range.

Given the magnitude of the recent retracement, completing the "head and shoulders bottom" pattern may require a sideways trading phase of approximately two weeks. Therefore, the strategy remains focused on buying the dips.

Trading Recommendations

Trading Direction: Buy

Entry Price: 1.0799

Target Price: 1.8440

Stop Loss: 1.7810

Valid Until: Nov 30, 2024 23:55:00

Support: 1.7933, 1.7885, 1.7837

Resistance: 1.8028, 1.8084, 1.8232

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