NZD/USD rally capped by strengthening US Dollar, housing market recovery

• US housing market data shows the recovery, bolstering the US Dollar and limiting NZD/USD gains.
• Improving US debt ceiling discussions boost Wall Street and investor sentiment.
• Despite some dovish-leaning Fed speakers, no rate cuts are expected by year’s end.

NZD/USD holds to its earlier gains but retraces after piercing the 200-day Exponential Moving Average (EMA) at 0.6256, as data from the United States (US) shows the housing market seems to recover. Therefore, the US Dollar (USD) is appreciating and putting a lid on the NZD/USD rise. The NZD/USD is trading at 0.6238 after hitting a daily low of 0.6224.

US debt ceiling talks progress; Fed speakers maintain the hawkish tone

The NZD/USD remains underpinned by an upbeat sentiment, though at the brisk that a sudden shift could turn into losses. US debt ceiling discussions would continue today after Tuesday’s talks improved, although US House Speaker McCarthy said the two sides remain apart. Nevertheless, he acknowledged that a deal could be done by the week’s end. Wall Street cheered Tuesday’s results, as the three major indices post gains above the 0.30% threshold.

The United States (US) data showed the housing market’s recovery. April’s Building Permits improved from a -3% plunge to a -1.5% contraction, as permits improved to 1.416M, lower than March’s 1.437M. Surprisingly, Housing Starts rose by 2.2%, crushing March’s figures of -4.5% contraction, expanding at a 1.401M annualized pace.

That, alongside solid US Retail Sales and Industrial Production, revealed on Tuesday, keeps the US Dollar (USD) in the driver’s seat, cushioning the NZD/USD’s rally. The US Dollar Index (DXY), a gauge that tracks the performance of six currencies vs. the USD, climbs 0.33%, up at 102.937, a headwind for the NZD/USD.

Given the backdrop, US Treasury bond yields advanced, while bets that the Federal Reserve would cut rates in 2023 diminished. On Tuesday, odds for 75bps of rate cuts were 33.5%, while as of writing, diminished under 27%, as shown by the CME FedWatch Tool. Most investors are still pricing 50 bps of cuts by December 2023.

In the meantime, Federal Reserve speakers maintained their hawkish stance. However, the newly appointed Chicago Fed President Aaron Golsbee and Dallas Fed President Lorie Logan are leaning towards a dovish posture. Nevertheless, both commented that no rate cuts are expected by the year’s end.

On the New Zealand front, the economic calendar was empty. Nevertheless, a strong jobs report at the beginning of the month increased the likelihood of another rate hike, as the Overnight Cash Rate (OCR) sits at 5.25%. Swaps are pricing for the Reserve Bank of New Zealand (RBNZ) to raise rates to 5.50% in the upcoming May meeting.

NZD/USD Price Analysis: Technical outlook