NZD/USD rallies towards 0.6300 after Fed’s Powell press conference

• The US central bank raised rates by 75 bps, to 1.75%.
• Fed Chair Jerome Powell opened the door for 50 or 75 bps increases in the July meeting.
• The Federal Reserve would begin cutting rates in 2024, according to the Fed’s SEP.

The NZD/USD advanced after the Federal Reserve hiked 75 bps, the biggest rate increase since 1994, which sent the NZD/USD towards the daily low of around 0.6214. However, Fed Chair Powell shifted less hawkish than expected, so the New Zealand dollar got bid and is rallying above 0.6300, gaining 1.55%, during the day.

Sentiment remains positive, as traders have already priced in the expectations of a higher-than-expected rate increase. US equities record gains between 1.41% and 2.73%. In the FX space, the greenback is getting battered. Portraying the previously-mentioned is the US Dollar Index, falling 0.52%, back below the 105.000 figure.

In his press conference, Jerome Powell, the Federal Reserve Chair, said that “Clearly, today’s 75 basis point increase is an unusually large one and I do not expect moves of this size to be common.” However, he kept the door open for the July meeting, stating that 50 or 75 rate hikes are in play.

Recap of the FOMC’s statement

The Federal Reserve decision did not catch the markets off guard. The US central bank reiterated its commitment to reach the 2% target and reiterated that “inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.”

Concerning the US economic outlook, the board added that activity picked up after the Q1 negative reading. Regarding the reduction of the balance sheet, also known as Quantitative Tightening (QT), the plan started as revealed in May.

The aftermath of the monetary policy decision and Chair Powell’s press conference leaves a weaker US Dollar. US Treasury yields fell more than 10 basis points, from 2s-to-30s. The 10-year benchmark note yields 3.297%, almost 20 bps off highs.

The Federal Reserve Chair Jerome Powell reiterated at the press conference that ongoing increases are appropriate and emphasized that the labor market is extremely high and inflation too. Powell commented that when May inflation surprised to the upside alongside inflation expectations elevating, the FOMC decided that 75 bps was warranted in response.

Furthermore, in the same meeting, the Federal Reserve Open Market Committee (FOMC) unveiled the Summary of Economic Projections (SEP), which showed that the Fed reduced its expectations for growth from 2.8% in March to 1.7%, while the unemployment rate would uptick to 3.7% from 3.5% projected in March.

Concerning their inflation outlook, Fed policymakers estimate the Core PCE at 4.3%, more than the 4.1% foreseen in March. Regarding interest rates, the Federal Funds Rate by the end of 2022 is forecasted to increase by 3.4%, 150 bps more elevated than the 1.9% projected in March. Also, the FOMC expects rates to peak at around 3.8% in 2023, and they expect a rate cut by 2024.

Late in the day, the New Zealand economic docket will feature the Gross Domestic Product Growth Rates in the first quarter on a QoQ and YoY reading.

Key Technical Levels