NZD/USD contained below 0.6800 level as key US CPI data looms

Ahead of the release of this week’s most important economic data at 1330GMT, the December US Consumer Price Inflation report, FX markets are subdued and in in wait-and-see, with NZD/USD trading in contained fashion just below 0.6800. In earlier Wednesday trade, the pair briefly moved above its 21-day moving average in the 0.6780s and came within a whisker of a test of the psychologically important round 0.6800 figure but has since dropped back to the 0.6775 area. At current levels, the pair trades just under 0.2% lower on the day, with recent price action confirming that NZD/USD is, for now, trading within a short-term bearish trend channel that has been capping the price action since the start of the year.

With the US dollar having last week failed to rally despite an aggressive hawkish repricing of the market's expectations for Fed policy in 2022 and a subsequent sharp rise in US yields and having fallen to six-week lows (in the DXY) in wake of Fed Chair Jerome Powell’s not as hawkish as feared Congressional testimony on Tuesday, analysts are split over how they expect the dollar to react to Wednesday’s US inflation figures. According to Giles Coghlan, chief currency analyst at HYCM, “if we see core inflation below 5%, we'll see the dollar sell-off in a flash”. Meanwhile, ING currency strategist Francesco Pesole noted that with markets expecting an above 7.0% headline reading, any immediate market reaction should be contained.

Danske Bank takes the view that “a lower month-on-month number should not change much on the pricing of the Federal Reserve as they need more than one number to change their view on quantitative tightening and rate hikes.” The bank adds that “underlying price increases have been higher than estimated for many months now so risks seem skewed to the upside... High inflation and a tight labour market with no significant rebound in labour force participation put the Fed under pressure to hike (rates) more.” For these same reasons, ING argues that markets will keep buying the dips in the dollar for the time being”.

For NZD/USD, that suggests that if the pair was to break above its recent bearish trend channel on a softer CPI print, rally above 0.6800 and head back towards recent highs in the 0.6850s area, sellers may be attracted back. Resistance in the 0.6850-70 area which includes the December highs and 50-day moving average may prove formidable. To the downside, it's worth watching support in the 0.6730s.