NZD/USD extends upside near 0.6200 amid softer US CPI, hawkish hold by Fed

The NZD/USD pair extends the rally around 0.6195 despite the weaker US Dollar (USD) on Thursday during the early Asian session. The softer-than-expected US Consumer Price Index (CPI) inflation report in May has dragged the USD Index (DXY) lower to 104.25, but the hawkish hold by the Federal Reserve (Fed) helped the DXY to regain some composure.

Inflation in the United States cooled more than expected in May, the US Bureau of Labor Statistics (BLS) showed on Wednesday. The Consumer Price Index rose 3.3% YoY in May, compared to the previous reading and expectations of 3.4%. On a monthly basis, the CPI figure held flat in May, the first time since July 2022, compared to a 0.3% gain in April.

The core CPI, which excludes volatile food and energy prices, rose 3.4% YoY in May, compared to a 3.6% rise in April and the estimation of 3.5%. On a monthly basis, the core CPI increased 0.2% MoM in May. 

The softer CPI report has boosted chances for Fed cuts this year and exerted some selling pressure on the USD. Investors are now pricing in a 73% chance of a rate cut from the Fed in September, up from 53% before the CPI data was released, according to the CME FedWatch tool.

Apart from this, the Fed held interest rates steady at their current range of 5.25% to 5.5% at its June meeting on Wednesday, as widely expected by market players. Fed Chair Jerome Powell said that the restrictive stance on monetary policy is having the effect on inflation that central bankers had hoped to see, but the Fed will wait to see sufficient progress. The Greenback recovers some lost ground following the hawkish hold of the Fed. 

On the other hand, China’s CPI inflation remained steady in May at 0.3% YoY, missing expectations for a 0.4% growth in the reported period. Meanwhile, China’s Producer Price Index (PPI) declined 1.4% YoY in May from the previous reading of a 2.5% drop, above the market forecast of a 1.5% decrease. However, the mixed Chinese economic data had little impact on the New Zealand Dollar (NZD), even though China is New Zealand's biggest trading partner. 

The hawkish stance of the Reserve Bank of New Zealand (RBNZ) continues to underpin the Kiwi and create a tailwind for the NZD/USD pair for the time being. The New Zealand central bank is concerned about sticky domestic inflation and has an increased chance of a future hike, while the RBNZ is expected to maintain its current policy stance until at least mid-2025.