NZD/USD clings to gains above mid-0.6100s, lacks bullish conviction ahead of US NFP

• NZD/USD gains some positive traction on Friday and draws support from subdued USD demand.
• The divergent Fed-RBNZ policy outlook could lend support to the pair amid looming recession risk.
• Traders might also prefer to wait on the sidelines ahead of the release of the key US NFP report.

The NZD/USD pair catches fresh bids during the Asian session on Friday and reverses a part of the previous day's retracement slide from the 0.6215-0.6220 region, or a two-week high. Spot prices currently trade around the 0.6170 region, up nearly 0.20%, and for now, seem to have snapped a two-day losing streak, though any meaningful upside still seems elusive.

The US Dollar (USD) struggles to gain any meaningful traction and consolidates the overnight losses amid the uncertainty over the Federal Reserve’s (Fed) future rate-hike path, which, in turn, lends some support to the NZD/USD pair. The minutes from the June FOMC meeting released on Wednesday revealed that almost all members supported resuming rate hikes as inflation remains unacceptably high. Adding to this, Thursday's upbeat US ADP report and the ISM Services PMI reaffirmed market bets for a 25 bps lift-off at the upcoming FOMC policy meeting on July 25-26. That said, the Prices Paid sub-component of the ISM survey fell to a more than two-year low and suggested that the closely watched services inflation is gradually slowing. This, in turn, fueled speculations that the Fed will eventually soften its hawkish stance sooner rather than later and keeps the USD bulls on the defensive.

Nevertheless, the US central bank still seems poised to tighten its monetary policy further to combat stubbornly high inflation. In contrast, the Reserve Bank of New Zealand (RBNZ) had signalled that it was done with its most aggressive hiking cycle since 1999 after raising rates by 25 bps to the highest in more than 14 years in May. Moreover, the latest Reuters poll indicates that most economists expect the RBNZ to hold the official cash rate steady on July 12, for the first time in nearly two years. This, along with China's economic woes and the risk of a further escalation in the US-China trade conflict, might continue to weigh on antipodean currencies, including the Kiwi, and cap gains for the NZD/USD pair. Traders might also refrain from placing fresh directional bets and prefer to wait on the sidelines ahead of the release of the closely-watch US jobs data later during the early North American session.

The popularly known NFP report might influence Fed's near-term policy outlook, which, in turn, will play a key role in driving the USD demand and determining the near-term trajectory for the NZD/USD pair. In the meantime, elevated US Treasury bond yields, along with the caution market mood, could act as a tailwind for the safe-haven buck and contribute to keeping a lid on spot prices. Hence, it will be prudent to wait for strong follow-through buying before positioning for the resumption of the recent move-up from the 0.6050 area. Nevertheless, the major seems poised to register modest weekly gains and now looks to the RBNZ policy meeting next Wednesday for a fresh impetus.

Technical levels to watch