NZD/USD hangs near daily low, below mid-0.6300s on the back of stronger USD

• NZD/USD pulls back from a nearly two-month top set on Thursday amid resurgent USD demand.
• Economic worries boost the safe-haven buck and exert pressure on the perceived riskier Kiwi.
• The fundamental backdrop warrants some caution before positioning for any meaningful slide.

The NZD/USD pair retreats from the 0.6385 region, or a nearly two-month high touched earlier this Thursday and maintains its offered tone through the first half of the European session. The pair is currently placed just a few pips above the daily low and trades around the 0.6345-0.6340 region, down

Mixed Chinese inflation data released on Thursday raises concerns about the broader economic outlook for the second quarter and turns out to be a key factor weighing on antipodean currencies, including the Kiwi. In fact, the National Bureau of Statistics (NBS) reported that the headline CPI in China rose by 0.1% rate in April, the lowest rate since February 2021, giving further evidence of tepid domestic demand. Moreover, China’s Producer Price Index (PPI) contracted for the seventh consecutive month and registered its fastest drop since May 2020. This, along with the resurgent US Dollar (USD), prompts aggressive long-unwinding around the NZD/USD pair and contributes to the intraday decline.

In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, shot to over a one-week high in the wake of some short-covering amid the uncertainty over the Federal Reserve's (Fed) policy outlook. The US CPI report released on Wednesday showed that consumer prices fell below the 5% YoY rate in April for the first time in two-year. This, in turn, paves the way for an imminent pause in the US central bank's year-long rate-hiking cycle. In fact, the CME's FedWatch tool indicates a greater chance that the Fed will hold interest rates at their current level in June. Investors, however, remain divided over the possibility of rate cuts later this year, which benefits the USD and weighs on the NZD/USD pair.

That said, expectations for further rate hikes by the Reserve Bank of New Zealand (RBNZ) might hold back traders from placing aggressive bearish bets around the NZD/USD pair and help limit deeper losses, at least for the time being. Market participants now look forward to the US economic docket, featuring the release of the Producer Price Index (PPI) and the usual Weekly Initial Jobless Claims data later during the early North American session. This, along with Fed Governor Christopher Waller's scheduled speech and the US bond yields, will influence the USD price dynamics and allow traders to grab short-term opportunities.

Technical levels to watch