NZD/USD bounces off post-RBNZ low, still well offered around 0.6920-15 area

• NZD/USD dropped to the lowest level since October after RBNZ announced its policy decision.
• A 25 bps rate hike might have disappointed investors anticipating a faster rate tightening cycle.
• A subdued USD demand helped limit any further losses amid slightly overstretched conditions.

The NZD/USD pair trimmed a part of the post-RBNZ losses to the lowest level since October 6 and was last seen trading around the 0.6915-20 region, still down over 0.50% for the day.

The pair witnessed heavy selling for the fourth successive day and dropped to sub-0.6900 levels on Wednesday after the Reserve Bank of New Zealand (RBNZ) announced its policy decision. The RBNZ opted to increase its official cash rate (OCR) for the second time in two months, by 25 basis points to 0.75%. The outcome, however, disappointed some market participants anticipating a 50 bps hike and prompted aggressive selling around the NZD/USD pair.

Meanwhile, the RBNZ increased its projection for the eventual peak in the cash rate to 2.6% by the fourth quarter of 2023 as against its previous forecast for 2.1% by early 2024. This, along with a subdued US dollar demand, assisted the NZD/USD pair to find some support at lower levels. The USD extended its consolidative price move for the second straight day amid retreating US Treasury bond yields, though a combination of factors acted as a tailwind.

Investors have been pricing in the possibility for an eventual Fed rate hike move by July 2022 amid worries about stubbornly high inflationary pressure. Moreover, the Fed funds futures indicate a high likelihood of another raise by November. The market bets were boosted further after Jerome Powell renomination for the role of the Fed chair. Apart from this, a softer risk tone underpinned the safe-haven USD and weighed on the perceived riskier kiwi.

The fundamental backdrop seems tilted firmly in favour of bearish trades, though slightly oversold conditions on short-term charts warrant some caution before positioning for any further losses. Market participants now look forward to the US economic docket, highlighting the releases of the Prelim (second estimate) US Q3 GDP, Durable Goods Orders and Core PCE Price Index later during the early North American session.

This, along with the FOMC meeting minutes, will influence the USD price dynamics and provide a fresh impetus to the NZD/USD pair. Traders will further take cues from the broader market risk sentiment to grab some short-term opportunities around the major.

Technical levels to watch