NZD/USD stretches recovery to near 0.6250 as USD Index retreats on Fed’s dovish guidance

The NZD/USD pair has extended its recovery move to near 0.6250 in the Asian session. The Kiwi asset rebounded firmly from 0.6220 as the US Dollar Index (DXY) showed a short-lived pullback move after dropping to near 102.00. The USD Index is hovering near its six-month low and is expected to continue its downside momentum as the Federal Reserve (Fed) has approached to its terminal rate.

A 25 basis point (bp) rate hike by the Fed was widely anticipated, which pushed rates to 4.75-5.00%. Fed chair Jerome Powell tried harder to maintain his hawkish stance citing that rate cuts in 2023 are not into consideration as restrictive monetary policy is highly required to bring down the inflation rate to 2%. The stage of hawkish stance got de-railed after Fed Powell commented “some additional policy firming may be appropriate”, which indicated that the Fed has come closer to pausing the rate-hiking spell.

United States equities went through a massive sell-off on Wednesday as Fed Powell stemmed fears of a dismal economic outlook due to lower demand and the scale of economic activities. Cues from Fed Powell’s commentary indicate that the US banking system is ‘sound and resilient’ but tight credit conditions for households and businesses cannot be ruled out.

Coming to Asia-Pacific, the New Zealand Dollar is struggling to maintain its feet as the street is anticipating a lower growth rate in the kiwi zone after the flood situation.

Meanwhile, Reserve Bank of New Zealand (RBNZ) Chief Economist Paul Conway on Thursday said interest rates were clearly contracting and causing a welcome slowdown in demand in the economy, though it was not yet clear that inflation expectations were under control, as Reuters reported.