NZD/USD under pressure as the US dollar recovers ahead of key events

• NZD/USD pressured as US dollar battles back. 
• The Aussie GDP data will be eyed and US events this week are key. 

At 0.6517, NZD/USD is lower on the day, losing some 0.57% after falling from a high of 0.6563 to a low of 0.6482. We have seen a recovery in the greenback that was dragged higher by a rally in US bond yields. Equally, a weak open for key US equity indices weighed on the antipodean currencies.

''While the Kiwi recovered off lows below 0.65 as equities clawed back gains, it remains below levels prevailing yesterday. With no local data today, the immediate focus will be on Australian Gross Domestic Product data and more broadly on the state of global risk appetite,'' analysts at ANZ bank explained.

''As we noted yesterday, the medium-term outlook is complicated: NZ enjoys higher interest rates, but that’s offset by growing fears of a hard landing (here and, to complicate things, in the US too), and blockages in the FX forwards market that are suppressing carry. It all speaks to volatility and a period of range trading rather than the need to radically adjust levels.''

Meanwhile, investors moved away from risk following the US Federal Reserve Governor Christopher Waller's remarks the prior day who advocated for the central bank to raise interest rates at every meeting until inflation is curbed. Specifically, Waller said “I support tightening policy by another 50 bp for several meetings. In particular, I am not taking 50 bp hikes off the table until I see inflation coming down closer to our 2% target.”    

This has left markets with the expectation of further rate increases in the forthcoming months. Analysts at Brown Brothers Harriman explained that WIRP suggests 50 bp is fully priced in for June and July. ''However, a third 50 bp that was fully priced in for September is now about 50% priced in vs. 35% last week.  After September, two more 25 bp hikes are fully priced in and a third is partially priced in that would take the Fed Funds ceiling to between 3.0-3.25%.''

 What’s really changed is that rates are seen peaking in mid-2023 before falling in H2 23 and beyond, the analysts added. ''This would only happen if the US were to fall into recession next year and while it is possible, it is not our base case.  This week’s data will be very important for near-term market expectations.''

Looking ahead for the week, the US Nonfarm Payrolls and important survey data will be reported. We get the regional Fed manufacturing surveys wrap-up and May ISM manufacturing PMI will be reported tomorrow and is expected at 54.5 vs. 55.4 in April. 

We also have US President Joe Biden who said he and Jerome Powell will discuss inflation in a White House meeting Tuesday and pledged to give the Federal Reserve chair space to do his job.

• Biden and Powell to discuss inflation, US dollar on a knife's edge