NZD/USD recovers early lost ground, upside seems limited ahead of the crucial Fed decision

• NZD/USD attracts dip-buying on Wednesday and draws support from modest USD weakness.
• Hopes for more stimulus from China also benefit antipodean currencies, including the Kiwi.
• The fundamental backdrop favours bulls, though traders might wait for the FOMC decision.

The NZD/USD pair recovers a major part of its modest intraday losses to the 0.6180 area and climbs back closer to the top end of its daily range during the early European session. Spot prices currently trade around the 0.6220-0.6225 region and look to build on the recent gains registered over the past two days, from the 0.6155 region, or a two-week low touched on Monday.

The US Dollar (USD) drifts lower for the second successive day and retreats further from a two-week high set the previous day, which, in turn, assists the NZD/USD pair to attract some dip-buying at lower levels. Furthermore, the latest optimism led by expectations that the Chinese government will roll out more measures to support the economy remains supportive of the prevalent risk-on environment. This is seen as another factor acting as a tailwind for the risk-sensitive Kiwi, though the upside seems limited as traders seem reluctant to place aggressive bets ahead of the highly-anticipated FOMC monetary policy decision.

The US central bank is widely expected to raise borrowing costs by 25 bps. Investors, meanwhile, remain sceptic if the Federal Reserve (Fed) will commit to a more dovish stance in the wake of an extremely resilient US economy. The markets, however, have been pricing out the possibility of any further interest rate hikes this year. Hence, the accompanying monetary policy statement and Fed Chair Jerome Powell's comments at the post-meeting press conference will be scrutinized for cues about the future rate-hike path. This, in turn, will drive the USD demand and provide a fresh directional impetus to the NZD/USD pair.

Heading into the key central bank event risk, traders on Wednesday will confront the release of New Home Sales data from the US. The data, however, might do little to provide any meaningful impetus to the buck. The downside for the NZD/USD pair, meanwhile, seems cushioned in the wake of expectations for a more hawkish Reserve Bank of New Zealand (RBNZ), bolstered by stronger domestic consumer inflation figures released last week. This, in turn, suggests that the path of least resistance for spot prices is to the upside and the recent corrective slide from a multi-month peak might have already run its course.

Technical levels to watch