NZD/USD remains depressed below 0.6500, downside seems limited amid subdued USD demand

• NZD/USD meets with some supply in reaction to unimpressive consumer inflation data.
• The yearly CPI rate falls short of RBNZ’s forecast and weighs on the domestic currency.
• Subdued USD price action lends some support to the pair and helps limit deeper losses.

The NZD/USD pair comes under some selling pressure on Wednesday and snaps a three-day winning streak back closer to its highest level since June 2022 touched last week. The pair remains depressed below the 0.6500 psychological mark through the early European session, though lacks follow-through amid subdued US Dollar price action.

The New Zealand Dollar weakens a bit following the release of domestic consumer inflation data, which showed that the headline CPI for the fourth quarter of 2022 decelerated to 1.4% from the 2.2% previous. Adding to this, the annual inflation rate came in below the Reserve Bank of New Zealand's (RBNZ) 7.5% forecast and remained stable at 7.2%. The data forces investors to lower their expectations for the cash rate to peak at 5.5% in New Zealand down to just 5.0% and prompts some selling around the NZD/USD pair.

Furthermore, worries about a deeper global economic downturn keep a lid on any optimism in the markets and further contributes to driving flows away from the risk-sensitive Kiwi. That said, the underlying bearish sentiment surrounding the Greenback helps limit the downside for the NZD/USD pair. In fact, the USD Index, which tracks the Greenback's performance against a basket of currencies, remains depressed near a nine-month low amid expectations for a less aggressive tightening by the Fed.

The markets now seem convinced that the US central bank will soften its hawkish stance and have been pricing in a greater chance of a smaller 25 bps rate hike in February. This might continue to weigh on the buck and supports prospects for the emergence of some dip-buying around the NZD/USD pair. Hence, it will be prudent to wait for strong follow-through selling before confirming that the pair has topped out in the near term and positioning for any deeper corrective pullback.

From a technical perspective, the NZD/USD pair has reached a significant resistance level at the same price level as the December 13 peak high at 0.6515. This suggests it is at an important inflection point where there is a risk of a reversal and move lower. At the moment, however, there are no signs on the charts of such a bearish reversal such as a Japanese candlestick pattern or oscillator signal - RSI remains in upper neutral territory with room to push higher. Thus, as things are, the bullish trend remains dominant and intact with a default expectation that it should extend. A clear break and close with strength and volume through the 0.6515 ceiling would provide more confirmation of a contunuation higher.  

There isn't any major market-moving economic data due for release from the US on Wednesday. That said, the broader risk sentiment might influence the USD price dynamics and provide some impetus to the NZD/USD pair. Traders, however, might prefer to wait on the sidelines ahead of this week's important US macro releases, including the Advance Q4 GDP print and the Core PCE Price Index on Thursday and Friday, respectively.

Technical levels to watch