NZD/USD dives to five-week low, further below mid-0.6100s

• NZD/USD drops to a five-week low on Friday and is pressured by a combination of factors.
• Thursday’s softer domestic consumer inflation figures continue to weigh heavily on the NZD.
• Bets for more Fed rate hikes and a weaker risk tone act as a tailwind for the safe-haven USD.

The NZD/USD pair remains under heavy selling pressure for the second successive day on Friday and drops to a five-week low during the first half of the European session. The pair is currently placed around the 0.6135-0.6130 region, down over 0.60% for the day, and is pressured by a combination of factors.

The New Zealand (NZD) is undermined by the softer domestic consumer inflation figures released on Thursday, which entails a less hawkish stance by the Reserve Bank of New Zealand (RBNZ). In contrast, the Federal Reserve (Fed) is expected to continue raising interest rates, which, along with a softer risk tone, benefit the safe-haven US Dollar (USD) and drag the NZD/USD pair lower on the last day of the week.

The markets seem convinced that the Federal Reserve will raise rates by 25 bps in May and have been pricing in a small chance of another rate hike in June. The bets were reaffirmed by the recent hawkish commentary by several Fed policymakers, judging that inflation is still at problematic levels and monetary policy needs to be tightened still. This, to a larger extent, overshadows, Thursday's dismal US macro data.

Meanwhile, the prospects for further policy tightening by the US central bank fuel worries about economic headwinds stemming from rising borrowing costs. This, in turn, tempers investors' appetite for riskier assets, which further contributes to driving flows away from the risk-sensitive Kiwi. That said, a further decline in the US Treasury bond yields caps gains for the USD and might help limit losses for the NZD/USD pair.

Market participants now look forward to the release of the flash PMI prints from the US, due later during the early North American session. This, along with the US bond yields and the broader risk sentiment, will influence the USD price dynamics and produce short-term trading opportunities around NZD/USD pair on the last day of the week.

Technical levels to watch