NZD/USD retreats after hitting nearly three-month high, bullish potential intact

• NZD/USD gains strong positive traction on Wednesday and jumps to a nearly three-month top.
• The US CPI-inspired broad-based USD weakness turns out to be a key factor boosting the pair.
• A slightly overstretched RSI on hourly/daily charts is holding back bulls from placing fresh bets.

The NZD/USD pair catches fresh bids on Wednesday, following the previous day's modest downtick, and resumes its recent upward trajectory witnessed over the past two weeks or so. The momentum picks up pace following the release of the latest US consumer inflation figures and lifts spot prices to a nearly three-month high, around the 0.6380 region during the early North American session.

The US Dollar (USD) weakens across the board after the US Bureau of Labor Statistics reported that inflation in the US, as measured by the Consumer Price Index (CPI) rose 0.4% in April and the yearly rate eased to 4.9% from 5%. Meanwhile, the Core CPI, which excludes volatile food and energy prices, came in at 0.4% and 5.5% on monthly and yearly basis, respectively. In the absence of any upside surprise, the data reaffirms expectations for an imminent pause in the Federal Reserve's (Fed) year-long rate-hiking cycle, which, in turn, weighs heavily on the buck and provides a strong boost to the NZD/USD pair.

The markets, meanwhile, have also started pricing in the possibility that the US central bank will start cutting interest rates later this year, which, along with concerns about the US debt ceiling, leads to a fresh leg down in the US Treasury bond yields. It is worth recalling that US President Joe Biden and House of Representatives Speaker Kevin McCarthy remained divided over raising the $31.4 trillion US debt limit, though agreed to continue talks aimed at breaking the deadlock. Apart from this, a positive risk tone is seen undermining the safe-haven Greenback and benefitting the risk-sensitive Kiwi.

The New Zealand Dollar (NZD) draws additional support from expectations for further rate hikes by the Reserve Bank of New Zealand (RBNZ). This, in turn, suggests that the path of least resistance for the NZD/USD pair is to the upside. That said, the Relative Strength Index (RSI) on hourly and daily charts has moved on the verge of breaking into the overbought territory. This, in turn, prompts some profit-taking and leads to a modest pullback of around 30 pips in the last hour. Nevertheless, the aforementioned supportive fundamental backdrop should limit any meaningful corrective decline.

Technical levels to watch