NZD/USD soars to 0.6200 as soft US PPI propels bets for neutral Fed policy

• NZD/USD has climbed strongly to 0.6200 as the USD Index has fallen like a house of cards.
• Softer US PPI has strengthened the demand for US bonds, which has brought down 10-year US Treasury Yields to 3.78%.
• The New Zealand economy is expected to show a mild contraction by 0.1% in the first quarter.

The NZD/USD pair has demonstrated a solid rally to the round-level resistance of 0.6200 as the US Dollar Index (DXY) has fallen like a house of cards. The Kiwi asset has been strengthened as May’s United States Producer Price Index (PPI) has cooled down due to lower gasoline prices.

S&P500 futures have surrendered the majority of gains added in Europe as investors are looking forward to the interest rate decision and the release of the dot plot by the Federal Reserve (Fed). US equities are losing their charm for the time being, however, its broader appeal is still solid as investors are extremely confident that a neutral stance will be taken by Fed chair Jerome Powell.

Analysts at Commerzbank cited Fed’s Powell may try his best to make a July hike seem likely. But I hope that the currency market is not so stupid as to overlook the obvious contradiction between words and deeds that this would create.

The USD Index has extended its downside journey to near 102.90 as firms have passed on the comfort of lower gasoline prices to end consumers by reducing prices of goods and services at factory gates. Monthly headline PPI has contracted by 0.3% in May while the street was anticipated a 0.1% contraction while core PPI has maintained its pace at 0.2% as expected by the market participants in the same period.

Softer US PPI has strengthened the demand for US government bonds, which has brought down 10-year US Treasury Yields to 3.78%.

Meanwhile, the New Zealand Dollar is going to heavily react to the Q1 Gross Domestic Product (GDP) data, which will be announced on Thursday.  According to the preliminary report, Quarterly GDP is seen contracting by 0.1% against a prior contraction of 0.6%. On an annualized basis, the economic data is expected to expand by 2.6%, higher than the prior contraction of 2.2%.