NZD/USD faces barricades around 0.6380 as Fed’s hawkish guidance provokes a US recession

• NZD/USD has sensed selling pressure while stretching its recovery above 0.6370 amid broader pessimism.
• The Federal Reserve is considering wage inflation a major trigger that could propel general inflation.
• The New Zealand Dollar is going to display reflexive moves on the People’s Bank of China monetary policy.
• NZD/USD has retreated after testing the upward-sloping trendline while the downside filters are still solid.

NZD/USD has faced resistance of around 0.6380 in the early European session. The New Zealand Dollar major asset delivered a recovery after dropping to near 0.6320 and stretched its recovery in the Tokyo session as the risk-off impulse witnessed ease. However, the aversion theme is extremely solid on a broader note. The recovery move in the Tokyo session should not be considered a reversal for now as it needs more filters.

Meanwhile, the US Dollar Index (DXY) is displaying a subdued performance amid the absence of a potential trigger ahead. The USD Index is oscillating around 104.35 after correcting from above 104.80. S&P500 futures are extending Thursday’s sell-off as firms in the United States are having the trauma of higher interest obligations led by escalated terminal rate guidance. The 10-year US Treasury yields have attempted recovery and have surpassed 3.48% as the demand for US government bonds has fizzled out.

On the New Zealand front, investors are shifting their focus toward the interest rate decision by the People’s Bank of China (PBoC), which is scheduled for Tuesday. The New Zealand Dollar may display significant volatility, being one of the leading trading partners of China.

Federal Reserve sees wage inflation as a major threat ahead

Average Hourly Earnings in the United States are continuously advancing to justify tight labor demand. Firms spend a significant amount in retaining and hiring talent to maintain a comfortable flow of operational activities. Higher earnings by the households will continue to keep retail demand solid as individuals will be left with decent funds after catering necessities.

Rising wage inflation could propel general inflation ahead as lower inflation can be achieved with a higher unemployment rate. Escalating payroll numbers and eventually robust retail demand would keep inflation on the rooftop.

United States Retail Sales dropped larger than predicted

On Thursday, the monthly Retail Sales data (Nov) contracted by 0.3% while the street was expecting a contraction of 0.1%. A decline in retail demand would result in more inflation softening as firms will be forced to provide goods and services at lower prices.

Analysts at Wells Fargo expect spending to contract in CY2023 but it's too soon to call this the start of a sustained decline in goods spending. For making lower inflation projections, the United States economy is needed to show a sustained decline in consumer spending.

For further guidance, investors are keeping an eye on preliminary S&P PMI data. As per the projections, the Manufacturing PMI is seen unchanged at 47.7 while Service PMI would improve to 46.8 vs. the former release of 46.2.

New Zealand Dollar banks upon PBoC policy for further guidance

The central bank of the second largest economy is going to announce its monetary policy after easing prolonged Covid-19 restrictions. The People’s Bank of China is scheduled to announce its December monetary policy on Tuesday. Citing weaker economic prospects, a troubled real estate market, and contracted retail demand, the People’s Bank of China is expected to announce a dovish monetary policy. People’s Bank of China policymakers should look to trim their Prime Lending Rate (PLR) to support low inflation and deflation in factory-gate prices. A dovish policy stance by the People’s Bank of China is going to strengthen the New Zealand Dollar as the Kiwi economy will receive more business from China.

NZD/USD technical outlook

NZD/USD has sensed significant demand after dropping to near the upward-sloping trendline from November 21 low at 0.6087. The rebound from the aforementioned trendline needs to pass various filters for a bullish reversal consideration.

A bear cross, represented by the 20-and 200-period Exponential Moving Averages (EMAs) at 0.6384, indicates more weakness ahead.

The Relative Strength Index (RSI) (14) is attempting to shift into the 40.00-60.00 range. A decisive decline in the bearish range of 20.00-40.00 will trigger a bearish momentum.