NZD/USD bulls moving in on critical daily resistance but US dollar bites back

• NZD/USD bulls moving in on critical daily resistance and the counter trendline
• RBNZ will be the focus now that the markets have traded the US CPI.

At 0.6857, NZD/USD is up some 0.5% and has travelled from a low of 0.6805 to a high of 0.6889 so far. However, the Us dollar has firmed in recent trade owing to a recovery in US yields and the hawkish narrative surrounding the Federal Reserve. 

As measured by the DXY index, the US dollar is above the 100 level again after being below it at 99.74, the low for the start of the trading session. It is now printing fresh session highs of 100.332 as traders in the money markets rethink the outlook for the Federal Reserve despite the Core Consumer Price Index. The market was priced for a beat, but the core moved up by just 0.3%, below the 0.5% expectations and the smallest increase since September.

Nevertheless, the greenback did not stay down for long, and  US Treasury's 10-year auction hit a high yield of 2.72% on Tuesday, up from the 1.92% high in the previous month, which has helped support a hawkish sentiment in markets. The bid to cover ratio for the auction was 2.43, down from the 2.47 ratio in March, and the 10-year yield is recovering from the day's lows.

Overall, US inflation expectations remain elevated, and if the US 10-year yield moves beyond the 2.836% high, it will be on track to test the October 2018 high near 3.26%. Additionally, Fed officials are likely to remain hawkish, and given the market, expectations are still for a 50 bp hike next month; the US dollar has embarked on fresh cycle highs, on track for the March 2020 high near 103.

RBNZ in focus

Meanwhile, the Reserve Bank of New Zealand is meeting this Wednesday and has much work to do, according to analysts at TD Securities. ''We suspect the Board realises this too. However, hiking in 25bps increments at consecutive meetings won't fit the bill. The Bank now needs to hike in 50bps increments at its next two meetings. We see no compelling reason for the Bank to await incoming data before deciding to act more aggressively.''

NZD/USD technical analysis

The M-formation is a reversion pattern, and the price is embarking on a restest of the prior support in a 38.2% Fibonacci retracement near 0.69 the figure. Given the break of the dynamic trendline support, the bias is to the downside from a medium-term perspective, but it may be a little premature to expect such a trajectory for now. Instead, the price needs to stay with the bulls for a bit longer, at least into the RBNZ meeting.