The NZD/USD pair continues to climb steadily during the first half of the European session and is currently trading around the 0.6165-0.6170 range, slightly below the previous day’s three-week high.
The US Dollar (USD) is finding it challenging to stage a meaningful recovery and remains near its lowest level since May 17. This is primarily due to expectations that the Federal Reserve (Fed) will refrain from raising interest rates at the conclusion of its two-day policy meeting later today.
These expectations were reinforced by disappointing US consumer inflation figures on Tuesday, along with a slight decrease in US Treasury bond yields. As a result, the Greenback is undermined, while the NZD/USD pair benefits from this situation.
According to the US Labor Department, headline US CPI showed minimal growth in May, and the year-on-year rate slowed down to its lowest pace since March 2021. However, the annual inflation rate of 4.0% remains twice the Fed’s 2% target, keeping hopes alive for potential tightening of monetary policy.
As a matter of fact, the markets are now pricing in a higher probability of a 25 basis points interest rate hike at the July FOMC meeting. This expectation should limit the decline of US bond yields and provide some support for the US Dollar.
Additionally, there is pre-Fed anxiety in the market, along with concerns about a potential global economic slowdown, particularly in China. These factors could lead to a flight to safety and bolster the demand for the Greenback.
Moreover, the Reserve Bank of New Zealand (RBNZ) has clearly indicated that it has concluded its most aggressive interest rate hike cycle since 1999. This could restrict further gains for the NZD/USD pair. Traders may also choose to stay on the sidelines ahead of this significant central bank event.
Given the mixed fundamental landscape, it would be wise to wait for strong and sustained buying momentum before considering an extension of the recent recovery from the year-to-date (YTD) low, which was just below the psychological mark of 0.6000 reached in May.
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