NZD/USD bulls take control on dovish tilt at the Fed

• NZD/USD is ending the day on the bid following a dovish tilt at Fed.
• There is more data to come from the US that could tip the balance further. 

NZD/USD is some 0.6% higher on the day with the pair moving up from a low of 0.6191 to a high of 0.6277 on the day that the Federal Reserve confirmed the market's dovish sentiment. The event comes ahead of more key US data today and at the end of the week, so the Fed is not the be-all and end-all. However, the Fed has set a precedent for the day ahead which is a softer US dollar, risk-on, and a positive environment for the kiwi.

The FOMC raised the fed funds rate 75bp to a 2.25-2.5% target range, as widely expected. The decision was unanimous. During the press conference, Powell noted that further outsized hikes would be conditional on data, and that there will be less “clear guidance” on rate hikes from here, with slower hikes appropriate “at some point”.

Main takeaways from the Fed statement

• The Fed says recent indicators of spending and production have softened.
• Fed says job gains have been robust, the unemployment rate has remained low.
• Fed says inflation remains elevated, reflecting pandemic-related imbalances, higher food and energy prices, and broader price pressures.

The Fed funds rate futures forecast 3.4% in December after a 75 basis point hike. That leaves 107 basis points of tightening for the remainder of 2022 and thus, the market are pricing for a more dovish outcome for the September meeting as the Fed turns data-dependent.

Meanwhile, Jerome Powell, the Fed's chairman's presser concluded in recent trade and following a cautiously optimistic tone over the US economy. With the chair's warning of a softer labour market, the US dollar was down to the lows of the day at 106.279, losing 0.69% as per the DXY index into the close of the North American forex session ahead of the roll-over. 

Meanwhile, in the bigger picture, analysts at ANZ bank said that the USD steamroller continues, as highlighted by the Economist’s Big Mac Index, which suggests the NZD is 14% undervalued but has no shortage of company. 

More to come from the US calendar

Meanwhile, traders will now look to the US Gross Domestic Product data tomorrow and inflation readings on Friday. On the one hand, a positive reading for growth in Q2 following the -1.6% QoQ saar plunge in the first quarter could support the greenback as it might ''quash talk of recession, at least for the H1'', analysts at Rabobank argued. ''That said, speculation will remain as to the size and extent of any potential downturn in 2023.'' On the other hand, a negative outcome will be potentially bearish for the greenback. On Friday,  the Fed’s favoured PCE deflator numbers will also be key.