NZD/USD aims to sustain above 0.6300 as Reserve Bank of New Zealand to hike rates further

• NZD/USD is looking to keep its auction above 0.6300 amid the risk-on mood.
• A sudden jump in the odds of one more rate hike by the Federal Reserve has supported the USD Index in extending its recovery.
• The Reserve Bank of New Zealand is expected to extend rates further to 5% despite a bleak economic outlook.
• NZD/USD is gathering strength to deliver a breakout of the Flat Channel.

NZD/USD is displaying a back-and-forth action above the round-level resistance of 0.6300 in the early European session. The Kiwi asset is facing barricades in keeping its business above 0.6300 as the US Dollar Index (DXY) has extended its recovery above 102.20. The USD Index has stretched its recovery move amid a sudden rise in the odds of a 25 basis point (bp) interest rate hike from the Federal Reserve (Fed).

As per the CME Fedwatch tool, chances for one more 25 basis points (bps) rate hike to 5.00-5.25% have suddenly crossed above 58%. It seems that commentary from US Federal Reserve Board Governor Lisa Cook has provided a cushion to the USD Index. On Monday, Fed Governor Lisa Cook said that the US has low unemployment and high inflation. Thus, the Fed is currently focused on inflation and the disinflationary process is underway, but we are not there yet.  

Meanwhile, S&P500 futures are showing choppy moves in the early European session amid a lack of clarity for the Federal Reserve’s interest rate guidance, however, the risk appetite theme is still solid. Rising chances of consecutive 25 bps rate hike from the Federal Reserve are failing to provide support to US Treasury Yields. Yields generated on 10-year US Treasury bonds seem sideways above 3.42%.

US ISM Manufacturing PMI lands below 50.0 straight for the fifth month

The US Dollar Index witnessed a steep fall on Monday after the release of the United States ISM Manufacturing PMI data below 50.0, consecutively for the fifth time, conveyed that the US growth rate is expected to show a crackdown this quarter. The economic data contracted to 46.3 from the consensus of 47.5 and the former release of 47.7.

Also, New Orders Index contracted to 44.3 from the expectations of 44.6, which indicates that forward demand is expected to remain subdued. Weaker-than-anticipated US Manufacturing PMI has bolstered the chances of a recession ahead. Firms are struggling to extend their production as higher rates by the Federal Reserve are barricading them from tapping advances. Also, rising inflationary pressures are creating a lot of burden on households, which are struggling to offset the impact of inflated goods. This has stemmed to the need of pause rates sooner to infuse confidence among investors.

Investors shift focus on US Employment data

Investors are expected to get meaningful guidance after the release of the US employment data this week. Friday’s Nonfarm Payrolls (NFP) data will be keenly watched as higher additions of fresh labor would indicate that the overall demand is solid and the labor cost index would continue to flex its muscles.

But before that, Wednesday’s US Automatic Data Processing (ADP) Employment Change (March) data will remain in the spotlight. According to the estimates, the economic data will release lower at 205K vs. the prior release of 242K.

RBNZ to hike rates further despite bleak economic outlook

The New Zealand economy has been contracting as households are still recovering from the flood situation and stubborn inflation, which has already added a lot of burdens. Reuters reported that New Zealand's economy is expected to have shrunk 0.3% this quarter, following a 0.6% contraction in the final three months of 2022, indicating a mild recession that is likely to prompt the RBNZ to slow its torrid pace of rate hikes.

However, New Zealand’s stubborn inflation is expected to be addressed initially by the Reserve Bank of New Zealand (RBNZ) to safeguard the economy against further turmoil. The inflation rate in the Kiwi economy is been latest recorded at 7.3% and is required to be tamed sooner with restrictive monetary tools. In a March 27-30 Reuters poll, over 90% of economists said Reserve BANK OF New Zealand Governor Adrian Orr would hike the Official Cash Rate (OCR) by 25 basis points (bps) to 5.00% at its April 5 meeting, the highest since December 2008.

NZD/USD technical outlook

NZD/USD is gathering strength to deliver a breakout of the Flat Channel formed on a four-hour scale. A breakout of the flat channel will result in wider ticks and heavy volume. The 20-period Exponential Moving Average (EMA) at 0.6267 is providing support to the New Zealand Dollar bulls.

A decisive break into the bullish range of 60.00-80.00 by the Relative Strength Index (RSI) (14) will activate the bullish momentum.