NZD/USD sticks to modest recovery gains, lacks follow-through ahead of US data/FOMC

• NZD/USD gained some positive traction on Wednesday and move away from the YTD low.
• Subdued USD price action prompted some short-covering heading into the key event risk.
• Investors now eye the US ADP report and ISM PMI for some impetus ahead of the FOMC.

The NZD/USD pair maintained its bid tone through the first half of the European session and was last seen hovering near the daily high, around mid-0.6400s.

Following the previous day's two-way directionless price moves, the NZD/USD pair attracted some buying on Thursday and moved away from a near two-year low touched earlier this week. Given that the Fed's anticipated move to hike interest rates is already priced in, the US dollar bulls took a breather ahead of the highly-anticipated FOMC policy decision. This, in turn, was seen as a key factor that extended some support to the pair, though any meaningful positive move seems elusive.

Investors seem convinced that the US central bank would adopt a more aggressive policy response to curb soaring inflation and lift the benchmark interest rate to around 3.0% by the end of the year. This was reinforced by elevated US Treasury bond yields, which should act as a tailwind for the greenback and keep a lid on the intraday uptick for the NZD/USD pair. Hence, the market focus will remain glued to the outcome of a two-day FOMC meeting, scheduled later during the US session.

The US central bank is widely expected to raise interest rates by 50 bps and lay down plans to start shrinking its massive, a near $9 trillion balance sheet. Market players will also scrutinize Fed Chair Jerome Powell's remarks to see if the US central bank is ready to hike rates further even if the economy weakens. This will play a key role in influencing the near-term USD price dynamics and help determine the next leg of a directional move for the NZD/USD pair.

In the meantime, traders will take cues from the US economic docket - featuring the release of the ADP report on private-sector employment and the ISM Services PMI. The data, along with the broader market risk sentiment, could drive the USD demand and provide some impetus to the NZD/USD pair. That said, the immediate market reaction is more likely to be short-lived heading into the key central bank event risk.

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