New Zealand dollar fights back

NZD/USD is in positive territory on Wednesday, after an extended slide. In the North American session, NZD/USD is trading at 0.6244, up 0.46% on the day.

The New Zealand dollar received a boost today from an unexpected source, the European Central Bank. In a surprise move, the ECB held an emergency meeting earlier in the day and announced a new tool to combat the risk of eurozone fragmentation. The meeting was in response to rising yields in highly indebted countries, such as Italy and Greece, which has sparked fears of a debt crisis. After the announcement, yields on Italian and Greek bonds fell, sparking stronger risk appetite and pushing the New Zealand dollar higher.

Markets brace for 0.75% hike from Fed

This week’s highlight is the FOMC rate decision later today. The Fed is under pressure as red-hot inflation shows no signs of easing. CPI accelerated to 8.6% in April, up from 8.3% in March. This was the highest inflation rate since 1981. Just a few days ago, the most likely scenario was a 50-bps increase, but the markets are now pricing in (at almost 100%) a 0.75% hike. This will likely result in a sharp response from the financial markets. A massive 0.75% move, even one that has been priced in, should be bullish for the US dollar. Investors will also be closely monitoring the rate statement and Fed Chair Powell’s press conference.

The price for the Fed’s aggressive rate-tightening cycle could well be a recession, but Fed policy makers clearly prefer a (hopefully) short recession rather than inflation expectations becoming unanchored. The big question is will the Fed manage to guide the US economy to a soft landing as it continues to aggressively raise rates.

New Zealand releases first-quarter GDP on Wednesday, with the markets expecting a modest gain of 0.6% QoQ. This follows a 3.0% gain in Q4. The Reserve Bank of New Zealand will be keeping a close eye on the strength of the economy, as the Bank tries to steer the economy to a soft landing while raising interest rates. The FOMC rate announcement will likely overshadow the GDP release and play the pied piper for NZD/USD movement.

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NZD/USD Technical

• NZD/USD is testing resistance at 0.6224. Next, there is resistance at 0.6288
• There is support at 0.6099 and 0.5947

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