EUR/NZD Pulls Back From Its December High

Today the EUR/NZD rate touched the 2.4000 level — the highest reading since late November — but then saw a fairly sharp pullback. Fundamentally, the heightened volatility is driven by a combination of factors.

The euro (EUR) is showing strength because:
→ industrial production in the euro area unexpectedly rose by 0.8% (above forecasts), easing recession fears;
→ the market expects a more measured tone from the European Central Bank amid stabilising data. The meeting will take place on Thursday, 18 December.

On the other hand, the New Zealand dollar (NZD) has come under pressure:
→ a report published on 9 December by the New Zealand Treasury (the Half Year Economic and Fiscal Update) delivered a gloomy outlook: the economic recovery is stalling, and unemployment could rise to 5.5%;
→ prices for dairy products (the country’s main export) are falling, undermining the resilience of the “kiwi”.

That said, the EUR/NZD chart suggests that the scope for further upside may be limited.

Technical Analysis of the EUR/NZD Chart

From 29 November to 12 December, the pair declined (A→B) by roughly 2.9%, and then rallied to today’s peak (2), which lies almost exactly midway between the extremes at A and B. From a Fibonacci perspective, this can reasonably be interpreted as a normal pullback to the 50% level, after which the downward move may resume.

From the viewpoint of trend channels, the descending channel has been expanded upwards, while today’s move (up then down) essentially resembles a Bearish Engulfing pattern — formed during an attempt to break above the upper boundary of the channel.

Many indicators are likely to show divergence between highs 1 and 2. Therefore, taking all of the above into account, forex traders should keep in mind a scenario in which the upward trajectory of the past seven days (shown in blue) is broken by the bears, and the EUR/NZD rate continues to develop within the descending channel.

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