The outlook for the pair is still bearish even after it formed a morning star pattern. 

Bearish View

• Set a sell-limit at 0.6197 and a take-profit at 0.6127.
• Add a stop-loss at 0.6242.
• Timeline: 1-2 days.

Bullish View

• Set a buy-stop at 0.6197 and a take-profit at 0.6242.
• Add a stop-loss at 0.6100

The NZD/USD pair has been in a strong bearish trend as investors embrace a risk-off sentiment. The pair crashed to a low of 0.6127, which was the lowest level since May 25th, 2020. It has fallen in the past six straight weeks and retreated by 17% from its highest point in 2021.

Risk-Off Sentiment

The NZD/USD pair has crashed in the past few months as investors move to the safety of the US dollar. The dollar index has surged to a multi-year high of over $106 as investors, businesses, and individuals move to its safety.

The strength of the greenback is mostly because of the soaring inflation around the world and the actions by the Federal Reserve and other banks. The bank has already hiked interest rates by 150 basis points and Jerome Powell has hinted that more is yet to come.

Therefore, many people have shifted their currency holdings from their local currencies to the higher-yielding US dollar. As a result, the euro and Japanese yen crashed to the lowest level in over 20 years.

Meanwhile, the New Zealand dollar has also dropped because of the relatively weak economic data from the country. Data published on Tuesday showed that business confidence tumbled to -65% in the second quarter as companies continue dealing with the rising inflation. Weak business and consumer confidence is usually a negative sign because it tends to affect spending.

New Zealand is a commodity-rich country. As such, the economy tends to do well when some prices are rising. Data published by ANZ showed that the commodity price index dropped by 0.4% in May.

Therefore, investors will be waiting for the upcoming RBNZ interest rate decision scheduled for next week. Like other banks, analysts believe that the bank will hike again even as the country faces stagflation.

NZD/USD Forecast

The four-hour chart shows that the NZD/USD pair has been in a strong downward trend in the past few days. It has managed to drop below the important support levels at 0.6242 and 0.6195. The pair has also formed a descending channel that is shown in purple and moved below the 25-day moving average.

Therefore, the outlook for the pair is still bearish even after it formed a morning star pattern. As such, the next key level to watch will be at this week’s low of 0.6125.

The market is likely to see a lot of negative pressure and perhaps will continue to see a lot of follow-throughs.

The New Zealand dollar has fallen hard during the Monday session to break down through the 0.7650 level, an area that has been important more than once. By doing that, the market is likely to go looking to reach the 0.67 handle, followed by the 0.66 level. Keep in mind that the New Zealand dollar has been underperforming the Australian dollar as of late, so it does make a certain amount of sense that we would see this happen.

Breaking down the way we have suggests that there is more of a “risk-off” type of situation going on. The US dollar strengthening is a huge sign of concern. At this point, the market could drift as low as the 0.65 handle, which is where we had a major bounce happen. It is also worth noting that the commodity markets will have an outsized effect on this market, especially softs.

Looking at this chart, the market is also closing towards the bottom of the candlestick, and that does suggest that there should be a bit of follow-through. Because of this, the market is likely to see a lot of negative pressure and perhaps will continue to see a lot of follow-throughs.

The alternate scenario of course is that we turn around and take out the inverted hammer from the Friday session, opening up the possibility of a move to the 50 Day EMA, and then perhaps the 200 Day EMA after that. There is a lot of noise between here and there, so it does suggest that it will be much harder to rally than will be to fall. Because of this, I like the idea of fading short-term rallies that show signs of exhaustion if we get those opportunities. However, if we break down below the 0.67 handle, then I think it is only a matter of time before we continue to go much further to the downside.

The US dollar will have an outsized effect on this market as the New Zealand dollar does tend to be a little less liquid. That being said, it will more likely than not follow the AUD/USD pair, the EUR/USD pair, and all of the other major dollar-related markets. At this point, the market certainly looks threatened, and I just do not see that changing anytime soon.