NZD/USD bulls await move beyond 0.6500, focus shits to RBNZ and FOMC minutes on Wednesday

• NZD/USD gained strong positive traction on Monday and shot to over a two-week high.
• The risk-on impulse undermined the safe-haven USD and extended support to the kiwi.
• Expectations for an additional 50 bps rate hike by the RBNZ provided an additional lift.

The NZD/USD pair prolonged its recent strong recovery from a nearly two-year low touched earlier this month and gained traction for the third successive day on Monday. This also marked the sixth day of a positive move in the previous seven and lifted spot prices to over a two-week high during the mid-European session.

As China prepares to reopen at the beginning of June after a two-month lockdown, investors turned optimistic amid hopes that loosening COVID-19 restrictions would boost the global economy. This was evident from a generally positive tone around the equity markets, which dragged the safe-haven US dollar to a fresh monthly low and benefitted the risk-sensitive New Zealand dollar.

The kiwi was further underpinned by expectations that the Reserve Bank of New Zealand would increase the Official Cash Rate by an additional 50 bps on Wednesday. The central bank is also anticipated to provide a clear signal that further tightening is forthcoming. The combination of factors pushed the NZD/USD pair further beyond last week's swing high, around the 0.6415-0.6420 region.

Hence, the momentum could also be attributed to some technical buying, though stalled just ahead of the 0.6500 psychological mark. The said handle should now act as a pivotal point ahead of the key central bank event risk and the release of minutes of the latest FOMC meeting on Wednesday. This will play an important role in determining the next leg of a directional move for the NZD/USD pair.

The markets already seem to have fully priced in at least 50 bps Fed rate hike move over the next two policy meetings. Investors, however, will look for clues about the possibility of a jumbo 75 bps rate hike in June. Apart from this, important US macro data scheduled during the latter part of the week will influence the USD and further provide some meaningful impetus to the NZD/USD pair.

In the meantime, a goodish pickup in the US Treasury bond yields could lend some support to the buck. Moreover, absent relevant market moving economic releases from the US warrants some caution before placing fresh bullish bets around the NZD/USD pair. This makes it prudent to wait for sustained strength beyond the 0.6500 mark before positioning for any further appreciating move.

Technical levels to watch