- NZD/USD continues scaling higher on Friday and climbs to over a two-month high
- The uncertainty over the next Fed rate hike keeps the USD bulls on the defensive.
- A positive risk tone also seems to cap the USD and benefits the risk-sensitive kiwi.
The NZD/USD pair prolongs this week's strong move up and gains traction for the fifth successive day on Friday. The momentum lifts spot prices to over a two-month high, around the 0.6465-0.6470 region during the early European session.
The pair is supported by a weaker US dollar which struggles to capitalize on the overnight bounce from its lowest level since late June and is stuck in a range on the last day of the week. The uncertainty over the size of the next rate hike by the US central bank seems to act as a headwind for the greenback.
US CPI report on Wednesday revealed that consumer prices were unchanged in July. Adding to this, the US Producer Price Index unexpectedly fell in July for the first time in two years, suggesting that inflation may have peaked. This brought down future rate hike expectations.
Yet recent hawkish remarks by several Fed officials indicated that actually the Fed would stick to its policy tightening path. In fact, San Francisco Fed President Mary Daly, St. Louis Fed President James Bullard, Chicago Fed President Charles Evans and Minneapolis Fed President Neel Kashkari have backed the case for further interest rate hikes.
Markets are still pricing in at least a 50 bps Fed rate hike at the September meeting. This remains supportive of elevated US Treasury bond yields and offers some support to the USD. That said, signs of easing inflationary pressures have forced investors to trim bets for a 75 Fed rate hike at the September policy meeting.
The latest leg higher in the kiwi has managed to find acceptance above the 100-day SMA. This could be seen as a fresh trigger for bulls and supports prospects for a further near-term appreciation. Nevertheless, the NZD/USD pair remains on track to end the week with strong gains and records its highest weekly close since late May.
Market participants now look forward to the release of the Michigan US Consumer Sentiment Index, due later during the early North American session. Apart from this, the US bond yields would drive the USD demand. Traders would further take cues from the broader risk sentiment to grab short-term opportunities around the NZD/USD pair.
Technical levels to watch
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