The NZD/USD pair retreated on Tuesday, breaking a five-day winning streak that saw it reach a one-month high the day before. Currently trading in the 0.6335-0.6330 range during the early European session, the pair appears to be on the defensive, with the US dollar’s recent rally fueled by the surge in US Treasury bond yields cited as a key headwind.

The Fed’s quarterly Senior Loan Officer Opinion Survey (SLOOS) released on Monday indicated that the recent tightening of credit conditions for US businesses and households was due to aggressive rate hikes, not banking sector stress.

This has raised hopes that the US banking sector is not heading for a wider crisis and pushed US bond yields higher, which has supported the US dollar.

However, the upside potential for the USD remains limited in light of the Fed’s less hawkish stance. Last week, the central bank outlined a more stringent, data-driven approach to raising rates further and opened the door for a potential pause in its year-long rate-hiking cycle.

In addition, there are now expectations for the Fed to begin cutting rates in the latter half of this year. These factors, along with expectations of further rate hikes by the Reserve Bank of New Zealand (RBNZ), should prevent significant losses for the NZD/USD pair.

Traders are likely to tread cautiously ahead of the release of the latest US consumer inflation figures on Wednesday, as the crucial US CPI report could influence market expectations about the Fed’s next policy move.

This, in turn, will play a key role in driving the near-term USD demand and determine the next leg of the directional move for the NZD/USD pair. In the meantime, traders will take cues from a scheduled speech by New York Fed President John Williams on Tuesday in the absence of any relevant macroeconomic releases from the US.


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