NZD/USD retreats slightly from 2-week highs, trades below 0.6650

The NZD/USD pair extended its rally into an eighth straight day on Tuesday and reached its highest level in two weeks at 0.6653 but has gone into a consolidation phase with the trading action turning subdued ahead of the day's key events. As of writing, the pair was up 0.33% on a daily basis at 0.6640.

Earlier today, the data published by the Statistics New Zealand showed that the trade deficit in May narrowed slightly to $5.490 billion but was largely ignored by the market participants, who continue to price the Fed rate cut expectations. 

The US Dollar Index, which lost nearly 2% since the FOMC's dovish shift last week, is now moving sideways near the multi-month low that it set 95.84 earlier today. According to the CME Group's FedWatch Tool, there is now a 59.5% and a 40.5% probability of a 25 basis point and 50 basis point rate cut, respectively, in July. Later in the day, investors will be paying close attention to FOMC Chairman Powell's remarks. Furthermore, NY Fed President Williams and Atlanta Fed President Bostic are both scheduled to deliver speeches as well.

In the early trading hours of the Asian session on Wednesday, the Reserve Bank of New Zealand will announce its interest rate decision and release the policy statement. Although markets expect the policy rate to stay unchanged at 1.5%, the statement's language will be scrutinized for hints at a possible rate cut, which could force the pair to reverse its direction.

Previewing this event,  “Although GDP and CPI are close to the Bank's targets, we cannot rule out the possibility of the Bank delivering a surprise cut at this meeting to show it is ahead of the curve. OIS is placing less than a 20% chance to this outcome,” said TD Securities analysts.

Key technical levels to watch for