NZD/USD eyes a recovery near 0.6250 as Fed’s tightening cycle looks set to terminate

• NZD/USD is gauging a cushion below 0.6250 as US Inflation will be attacked by Fed’s rates and tight credit conditions.
• The upside for the USD Index looks restricted as the Fed is set to terminate its policy-tightening cycle sooner.
• Widening insurance blanket for deposits from US Yellen infused confidence among market participants.

The NZD/USD pair is showing signs of exhaustion in the corrective move below 0.6250 in the early Asian session. The Kiwi asset displayed a downside move on late Thursday after the US Dollar Index (DXY) rebounded from 102.00. The market tone is still upbeat as investors are cheering signals of a policy-tightening end recovered from Federal Reserve (Fed) chair Jerome Powell’s commentary.

The comment from Fed Powell that ‘some additional policy firming may be appropriate’ was sensed as music to the ears of investors. It is highly likely that the Fed is one rate hike far from reaching the terminal rate but the battle against sticky United States inflation will continue till Consumer Price Index (CPI) gets softened to 2%.

Meanwhile, S&P500 futures have carry-forwarded their positive move in early Asia as US Treasury Secretary Janet Yellen has stated that the government is ‘prepared for additional deposits actions if warranted’. Widening insurance blanket for deposits has infused confidence among market participants.

The US Dollar Index (DXY) has rebounded to near 102.60 but is likely to face stiff barriers ahead. US inflation would face dual attacks from now as the Fed is not willing to consider rate cuts this year and tight credit conditions from US banks for households and businesses would result in lower demand, weaker activities, and inflation softening.

Going forward, preliminary S&P Global PMI (March) data will be keenly watched. The Manufacturing PMI is expected to trim to 47.0 from the former release of 47.3. And, Service PMI might soften to 50.5 from the prior release of 50.6. Weaker-than-anticipated PMI data might impact the USD Index further.

The New Zealand Dollar is expected to gain strength ahead as the Reserve Bank of New Zealand’s (RBNZ) battle against inflation is far from over. More rate hikes are in pipeline from the RBNZ as NZ inflation has not meaningfully decelerated yet.