NZD/USD finds some support near 0.5900, upside potential seems limited amid bullish USD

• NZD/USD struggles to capitalize on its modest uptick led by the upbeat New Zealand GDP data.
• The Fed’s hawkish outlook, rising US bond yields continue to underpin the USD and cap gains.
• A softer risk tone also benefits the safe-haven USD and supports prospects for deeper losses.

The NZD/USD pair attracts fresh sellers following an intraday uptick to mid-0.5900s and drops to a fresh daily low during the early part of the European session on Thursday. Spot prices, however, manage to defend the 0.5900 round figure, though the fundamental backdrop supports prospects for an extension of the retracement slide from a nearly three-week high, around the 0.5985 region touched on Wednesday.

The New Zealand Dollar (NZD) did get a minor lift earlier today in reaction to the better-than-expected domestic data, showing that the economy expanded by 0.9% in the June quarter. Adding to this, the first quarter reading was also revised higher to 0.0% from a 0.1% contraction reported originally. The NZD/USD pair, however, struggles to attract any meaningful buying and the intraday uptick runs out of steam rather quickly in the wake of some follow-through US Dollar (USD) buying, bolstered by the Federal Reserve's (Fed) hawkish stance.

As was widely anticipated, the US central bank decided to keep interest rates unchanged at a 22-year high, though warned that sticky inflation was likely to attract at least one more interest rate hike in 2023. Furthermore, policymakers maintained the forecast for rates to peak between 5.5%-5.75% by the end of this year and see the benchmark rate at 5.1% next year, suggesting just two rate cuts in 2024 as compared to four projected previously. This remains supportive of rising US Treasury bond yields and lifts the USD back closer to a six-month top.

In fact, the yield on the rate-sensitive two-year US government bond rallies to its highest level since July 2006 and the benchmark 10-year US Treasury yield touches a 16-year peak. This revives concerns about headwinds stemming from rapidly rising borrowing costs and weighs on investors' sentiment. This is evident from a weaker tone around the equity markets, which should benefit the safe-haven buck and contribute to driving flows away from the risk-sensitive Kiwi, validating the negative outlook for the NZD/USD pair.

That said, a modest intraday USD pullback assists spot prices to defend the 0.5900 mark. Market participants now look to the US economic docket  – featuring the release of the usual Weekly Initial Jobless Claims, the Philly Fed Manufacturing Index and Existing Home Sales data later during the early North American session. This, along with the US bond yields and the broader risk sentiment, might influence the USD price dynamics and produce short-term trading opportunities around the NZD/USD pair.

Technical levels to watch