NZD/USD hovers below 0.5950 ahead of the Fed policy decision

• NZD/USD extends gains around 0.5940 ahead of the Fed decision.
• Improved US bond yields contribute support for the US Dollar (USD).
• Fed is expected to maintain its current interest rates in September.
• PBoC remained the benchmark one-year LPR at 3.45%.

NZD/USD extends its gains on the third successive day, trading higher around 0.5940 during the Asian session on Wednesday. However, the pair faced pressure earlier in the day ahead of the US Federal Reserve’s (Fed) decision.

US Dollar Index (DXY) surged during the American session on Tuesday as market sentiment deteriorated and US Treasury yields climbed higher. The DXY rebounded to 104.80, surpassing the 105.00 level.

DXY holds ground around 105.10 at the time of writing, supported by elevated US Treasury bond yields. The yield on the US 10-year Treasury note stands at 4.36% by the press time, below its highest level in 16 years, which presents a challenge for the Kiwi pair.

Market sentiment is that the Fed to keep interest rates at the current 5.25%-5.50% range in September, which could put pressure on the Greenback. According to the CME FedWatch Tool, the probability of another rate hike had been lowered in the November and December meetings.

However, the USD could find support as the possibility of keeping the policy rates higher for an extended period persists. This is due to the resilience of the US economy, characterized by easing inflationary pressures and stable labor growth.

Market participants will closely focus on the 'dot plots' to assess the expected interest rate trajectory. According to the recent Summary of Economic Projections (SEP), the Fed's median estimate indicates that rates could reach a peak of 5.6%.

According to a Reuters report, US Treasury Secretary Janet Yellen stated on Tuesday that, as the economy is operating at full employment, it's essential for US growth to slow down to a pace that aligns with its potential growth rate in order to bring inflation back to target levels.

Yellen also said "I think the Chinese would most likely use the policy space they have to try to avoid a slowdown with major proportions. There may be spillovers from China’s economic difficulties to the US."

On the other side, New Zealand’s Current Account data revealed the figure of $-4.208B for the second quarter, compared to the market consensus of $-4.800B and the previous figure of $-5.215B. While the Current Account - GDP Ratio for the same quarter declined by 7.5% against the previous 8.5% decline.

The People's Bank of China (PBoC) maintained the benchmark lending rates unchanged at their monthly fixing on Wednesday, in line with market expectations. The one-year Loan Prime Rate (LPR), which had been reduced by 10 basis points last month, remained at 3.45%, while the five-year LPR stayed steady at 4.20%.

Traders will closely monitor the US Federal Reserve's meeting decision scheduled for later on Wednesday during the North American session.