NZD/USD stable in 0.6725 area after Thursday/Friday’s APac session drop, next week’s Fed meeting & NZ CPI data eyed

• After dropping sharply during Thursday’s US and Friday’s APac sessions, NZD/USD has stabilised in the 0.6725 area.
• Next week’s Fed meeting and New Zealand CPI data will be the key events to watch.
• NZD/USD will be eyeing a test of the 0.6700 level.

After dropping sharply late on Thursday/during early Friday Asia Pacific trade after slipping below an uptrend that has supported the price action going all the way back to mid-December, NZD/USD has stabilised in the 0.6725 area. The pair broke below the uptrend during Thursday’s US session as stocks on Wall Street declined, which at the time weighed broadly on risk assets such as NZD. Though US (and global) equities have continued to decline on Friday, a sharp drop in US bond yields (related to safe-haven demand) has dampened the safe-haven appeal of the US dollar, shielding NZD/USD from further losses.

Next week is a big one for NZD/USD traders. During Wednesday’s US session, the Fed will release their latest policy decision, where they are expected to give the green light for multiple rate hikes in 2022 starting as soon as March and may give more details on quantitative tightening. Shortly after and at the start of Thursday’s Asia Pacific session, Q4 Consumer Price Inflation data will be released out of New Zealand. A hotter than expected outturn could result in a strengthening of the market’s conviction that the RBNZ is set to continue the rate hiking cycle it began last year and remain well ahead of the Fed regarding the removal of monetary accommodation.

Whilst that might be enough to give NZD a temporary lift, the currency will as usual trade mostly as a function of USD flows and risk appetite. It's been a bumpy start to the Q4 US earnings season – Netflix, the first major US tech company to report, is down over 20% on the day after Thursday’s earnings release – and this may continue to weigh on NZD. Generalised fears about Fed hawkishness, as well as a potential escalation in geopolitical tensions in Eastern Europe, might also continue to weigh on risk appetite and the kiwi. It seems very likely that NZD/USD, which is down just over 1.0% on the week from above 0.6700, will test and perhaps even break below 0.6700 in the coming week.