NZD/USD struggles to sustain above 0.6500 as USD Index shows stellar recovery

• NZD/USD is facing hurdles in shifting its auction above 0.6500 amid a recovery in the USD Index.
• Softening consumer spending has bolstered the expectations of a smaller interest rate hike by the Fed.
• This week, the release of the NZ Employment data will be of utmost importance.

The NZD/USD pair is failing in keeping its auction above the psychological resistance of 0.6500 in the early European session. The Kiwi asset is facing pressure as the US Dollar index (DXY) has shown a perpendicular recovery move after a sheer decline to near 101.40. The recovery move in the USD Index is quite strong and is showing signs of vertical decline in the risk appetite of the market participants.

S&P500 futures are continuously adding more losses as investors have underpinned the risk-aversion theme amid soaring volatility ahead of the interest rate decision by the Federal Reserve (Fed). While the alpha generated by the US government bonds has trimmed as investors are seeing a lower terminal rate than previously anticipated. The 10-year US Treasury yields have dropped to near 3.50%.

Softening consumer spending and Personal Consumption Expenditure (PCE) Price Index have bolstered the expectations of a smaller interest rate hike by the Fed. It is worth noting that Fed chair Jerome Powell has already trimmed the scale of interest rate hikes in its December monetary policy meeting to 50 basis points (bps) after announcing four consecutive 75 bps rate hikes. The Fed is expected to trim the scale of the interest rate hike further by 25 bps.

On the New Zealand front, investors are awaiting the release of the Employment data, which is due on Wednesday. The Employment Change (Q4) is expected to drop to 0.7% from the former release of 1.3%. While the Unemployment Rate is seen unchanged at 3.3%. The New Zealand economy is failing to generate significant employment opportunities amid higher interest rates by the Reserve Bank of New Zealand (RBNZ).