EURNZD: NZD Facing Structural Weaknesses (24th March)

Technical Analysis

• Interest Rate Outlook: Markets price the Official Cash Rate (OCR) above 3%, but risks suggest lower rates may be needed due to spare economic capacity.
• Economic Growth: Q4 GDP growth of 0.7% exceeded expectations but included one-off factors unlikely to persist.
• Inflation Risks: With high spare capacity (~ -1.5% output gap), disinflation remains a concern, increasing the risk of rates undershooting market expectations.

Fundamental Factors Affecting NZD

1. Growth Outlook: While NZ is technically out of recession, the underlying recovery remains weak, with low consumption growth (0.1%) and a declining residential investment sector.
2. Labour Market & Inflation: Unemployment has yet to peak, and inflation is close to target, meaning the RBNZ may need to keep rates neutral for longer or even cut below 3%.
3. Housing Market: 44% of mortgages are fixed for six months or less, meaning homeowners may benefit from lower fixed rates. However, it is unclear whether rising unemployment will boost spending.
4. External Factors: Higher commodity prices support exports, but global trade tariffs could slow growth.
5. Political & Policy Uncertainty:
   • RBNZ forecasts above-trend growth (2.6%)—which may be optimistic given trade risks.
   • Political uncertainty, including the departure of RBNZ Governor Adrian Orr, adds to volatility.

Key Takeaway for Traders

• NZD downside risks remain as economic slack persists, and rate cuts below 3% are possible.
• Watch for inflation undershooting in the coming months. If confirmed, the RBNZ may need a longer period of neutral or lower rates, pressuring the NZD.
• Housing stabilization and strong exports could provide limited upside, but overall growth is unlikely to remove spare capacity quickly.

EURNZD – H4 Timeframe

Following the bearish break of structure on the 4-hour timeframe chart of EURNZD, the Fibonacci retracement tool was plotted, with levels 61% to 88% being the significant areas of focus. The subsequent retracement is approaching the supply zone that overlaps the 61.8% retracement level after having swept liquidity from the previous internal structure, leading to a bearish sentiment.

EURNZD – H2 Timeframe

The price action on EURNZD's 2-hour timeframe chart validates the 4-hour timeframe sentiment by revealing the FVG (Fair Value Gap) that the price is expected to fill before being rejected from the supply zone.

Analyst's Expectations: 

Direction: Bearish

Target- 1.84964

Invalidation- 1.91228

CONCLUSION

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