NZD/USD bulls throw in the towel with 0.6200 eyed

At 0.6231, NZD/USD is lower by some 0.45% and has fallen from a high of 0.6280 to a low of 0.6224 on the day. The bears have been in charge during a risk-off day amid lower Us stocks and profit warnings from Walmart. Across the pond, the gas woes crippled the euro and send a bid on the US dollar. 

''With more key earnings results today and the Federal Open Market Committee tomorrow, volatility is likely going to stay elevated,'' analysts at ANZ Bank said. ''Focus will be on the Fed’s language and whether it is showing any concerns around the recent spate of disappointing survey data.''

The two-day FOMC started on Tuesday and the Fed is widely expected to hike rates 75 bp to 2.50%. WIRP suggests only around 15% odds of a 100 bp move. ''With the recent weakness in the data, there is simply no need to go bigger this week,'' analysts at Brown Brothers Harriman argued.

''Updated macro forecasts and Dot Plots won’t come until the September meeting.  Another 75 bp hike on September 21 is about 50% priced in. A 25 bp hike is fully priced in for November 2 but after that, one last 25 bp hike is only partially priced in. The swaps market paints a similar picture, with 175 of tightening priced in over the next 6 months that would see the policy rate peak near 3.5%. After that, an easing cycle is priced in for the subsequent 6 months.''

However, investors will be keeping a close eye on the Fed's forward guidance as it grapples with high inflation and the potential for a recession. ''Yes, the US economic data have been weakening but we do not think a recession is imminent,'' the analysts at BBH said. ''When all is said and done, we believe the US economy remains the most resilient. However, we expect a period of consolidation ahead for the dollar until the US economic outlook becomes clearer.''

Meanwhile, analysts at Rabobank said that they expect the USD to remain well bid on the back of safe haven demand despite speculation that the market may have over-estimated the extent of Fed policy tightening in the coming months.

''In our view, USD strength is likely to push NZD/USD back towards its recent lows in the 0,61 area on a 1 to 3-month view.  We expect USD strength to turn around on a 6-month view allowing NZD/USD to recover to the 0.64 regions.''