NZD/USD remains on the defensive after Chinese inflation data, holds above mid-0.6000s

• NZD/USD oscillates in a narrow trading band through the Asian session on Wednesday.
• The Chinese inflation figures fail to impress traders or provide any meaningful impetus.
• A mildly softer tone surrounding the USD turns out to be a key factor lending support.

The NZD/USD pair struggles to capitalize on the overnight late rebound from the 0.6035 area, or a two-month trough and edges lower during the Asian session on Wednesday. Spot prices remain on the defensive, around the 0.6055-0.6060 region and move little in reaction to the Chinese inflation figures.

In fact, data published by China’s National Bureau of Statistics (NBS) showed that the annual Consumer Price Index (CPI) fell 0.3% in July as compared to a flat reading in the previous month and consensus estimates for a 0.4% decline. On a monthly basis, the headline Chinese CPI rose by 0.2% in July against the 0.1% drop anticipated. This, however, was offset by the weaker-than-expected Producer Price Index (PPI), which contracted by 4.4% YoY in July, and do little to ease fears about faltering recovery in the world's second-largest economy or provide any impetus to the NZD/USD pair.

That said, hopes for additional stimulus measures from China help limit the pessimism and lends some support to antipodean currencies, including the New Zealand Dollar (NZD). Apart from this, a mildly softer tone surrounding the US Dollar (USD) turns out to be another factor acting as a tailwind for the NZD/USD pair. Any meaningful USD downfall, however, seems elusive in the wake of firming expectations that the Federal Reserve (Fed) will stick to its hawkish stance. In fact, market participants seem convinced that the Fed will keep interest rates higher for longer.

The bets were lifted by the closely-watched US monthly employment details released on Friday, which pointed to the continued tightness in the labour market. Moreover, Fed Governor Michele Bowman on Monday kept the door for one more 25 bps lift-off in September or November and said that additional interest rate hikes will likely be needed to lower inflation to the central bank's 2% target. That said, Philadelphia Fed President Patrick Harker said on Tuesday that they will probably start lowering the policy rate sometime next year, which, in turn, holds back the USD bulls from placing fresh bets.

Market participants also seem reluctant and might prefer to wait on the sidelines ahead of the latest US consumer inflation figures, due for release on Thursday. Nevertheless, the aforementioned fundamental backdrop seems tilted in favour of the USD bulls and suggests that the path of least resistance for the NZD/USD pair is to the downside.

Technical levels to watch