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NZD/USD Falls After Reaching a Three-Month High; Bullish Potential Remains Intact
NZD/USD acquires significant positive momentum on Wednesday and surges to an almost three-month high. Instigated by the US CPI, broad-based USD weakness proves to be a key factor in the pair's appreciation. On hourly and daily charts, a slightly overbought RSI is preventing bulls from placing new wagers.
The NZD/USD pair receives new bids on Wednesday, following a modest decline on Tuesday, and resumes its recent upward trend observed over the past few weeks. Following the publication of the most recent US consumer inflation figures, momentum picks up, pushing spot prices to a three-month high near 0.6380 in the early North American session.
After the US Bureau of Labor Statistics reported that US inflation, as measured by the Consumer Price Index (CPI), rose 0.4% in April and slowed to 4.9% annually from 5%, the US Dollar (USD) weakens across the board. The Core CPI, which excludes volatile food and energy prices, registered 0.4% monthly and 5.5% annually. In the absence of an upside surprise, the data confirms expectations for an imminent pause in the Federal Reserve's (Fed) year-long rate-hiking cycle, which bears heavily on the dollar and provides a significant boost to the NZD/USD exchange rate.
In the meantime, the markets have begun pricing in the possibility that the US central bank will begin reducing interest rates later this year, which, combined with concerns about the US debt ceiling, leads to a fresh decline in the yields on US Treasury bonds. It is important to recall that US President Joe Biden and House of Representatives Speaker Kevin McCarthy remained divided over raising the $31.4 trillion US debt limit, but agreed to continue discussions in an effort to break the impasse. A positive risk tone is seen as undermining the safe-haven dollar and benefiting the risk-averse New Zealand dollar.
The New Zealand Dollar (NZD) is supported by expectations that the Reserve Bank of New Zealand (RBNZ) will increase interest rates further. This implies that the path of least resistance for the NZD/USD pair is higher. In spite of this, the Relative Strength Index (RSI) on hourly and daily charts is on the verge of entering overbought territory. This results in some profit-taking and a modest retracement of around 30 pips in the final hour. However, the aforementioned supportive fundamental environment should limit any significant decline.
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