NZD/USD corrects to near 0.6340, upside seems solid ahead of US Inflation

• NZD/USD has shown a marginal correction to near 0.6340 amid some recovery in the USD Index.
• Investors are cautious ahead of the US Inflation data and debt-ceiling talks.
• US inflation is expected to remain stubborn amid accelerating labor earnings and upbeat demand for labor.

The NZD/USD pair has displayed a mild correction to near 0.6340 in the early Asian session after a juggernaut rally. The Kiwi asset is expected to resume its upside journey as the US Dollar is expected to remain on tenterhooks ahead of the US debt ceiling talks between the White House and major Republican leaders.

S&P500 remained choppy on Monday amid a mixed earnings bag, portraying a cautionary market mood. Investors are cautious ahead of the US Inflation data, scheduled for Wednesday, as it will provide better guidance about monetary policy action by the Federal Reserve (Fed) for its June monetary policy meeting.

The US Dollar Index (DXY) rebounded firmly after defending the critical support of 101.30. The street is anticipating that pausing the rate-hike spell by Fed chair Jerome Powell won’t be easy as US inflation is expected to remain stubborn amid accelerating labor earnings and upbeat demand for labor. US labor market conditions have not eased yet and as a result, employers are offering higher wages for recruiting fresh talent.

Going forward, a preliminary US inflation report indicates that the headline Consumer Price Index (CPI) remained steady in April at 5.0%. And, the core CPI that excludes oil and food prices softened to 5.5% from the former release of 5.6%. The Fed has come a long way from the peak of 9.1% but further deceleration would demand significant efforts on the monetary policy.

On the New Zealand Dollar front, investors are awaiting the release of China’s Consumer Price Index (CPI) data, which will release on Wednesday. Monthly CPI is seen as stagnant from a prior contraction of 0.3%. Annual CPI is expected to show further deflation to 3.2% from the former deceleration rate of 2.5%. This indicates weak demand from households.

It is worth noting that New Zealand is one of the leading trading partners of China and weak Chinese households’ demand will impact the New Zealand Dollar.