NZDUSD could be in for a correction early this week, as the pair bounced off its recent lows around the .6500 major psychological level. 

Applying the Fibonacci retracement tool on the latest swing high and low shows that the 50% level lines up with the broken support around .6650.

Stochastic is pointing up and moving out of the oversold region, indicating that a correction is bound to take place. RSI is also climbing, which means that buyers are in control of price action.

A shallow retracement could last only until the .6600 major psychological level, which lines up with the 100 SMA. Meanwhile, a larger correction could last until the 61.8% Fib near the 200 SMA. The short-term SMA is still below the longer-term 200 SMA, confirming that the path of least resistance is to the downside.

The main event risk for this setup is the RBNZ interest rate statement on Thursday’s early Asian trading session. The central bank just cut interest rates in their previous statement so they might sit on their hands for the time being, although recent data suggests that the economic slowdown is worsening.

Dairy prices have continued to tumble, according to the latest data from the country’s global dairy trade auctions. This has prompted several institutions to downgrade their milk payout forecasts, which would mean lower revenues and spending for farmers. The country’s quarterly CPI also fell short of expectations, underscoring the central bank’s weak inflation outlook.

Meanwhile, Fed Chairperson Yellen has expressed confidence in the US economic recovery, reminding traders that a rate hike could still take place before the end of the year. US headline and core CPI figures came in line with expectations of 0.3% and 0.2% gains respectively, signaling that inflation has been picking up in the economy.

By Kate Curtis from Trader’s Way