NZD/USD Faces Challenges Despite Early Week Positivity

NZD/USD kicks off the new week with a brief uptick, but several factors indicate a bearish outlook for the pair. Despite snapping a two-day losing streak and reaching the 0.6175 region during the Asian session on Monday, the NZD/USD pair faces potential downward pressure.

The US Dollar (USD) encounters selling pressure at the beginning of the week, interrupting its recent recovery from the lowest level since May 11. The decline in US Treasury bond yields weakens the Greenback and provides marginal support to the NZD/USD pair. Furthermore, the optimistic sentiment surrounding US equity futures undermines the USD's safe-haven status and favors the risk-sensitive New Zealand Dollar (Kiwi). However, concerns regarding a global economic downturn, particularly in China, hinder substantial optimism. S&P Global's downward revision of China's GDP growth forecast from 5.5% to 5.2% this year exacerbates the bearish sentiment. Additionally, major global banking institutions such as Nomura, Citibank, UBS, and Goldman Sachs have recently downgraded their projections, further contributing to the bearish sentiment. Moreover, the Federal Reserve's (Fed) hawkish stance is expected to limit USD losses and exert downward pressure on the NZD/USD pair.

It is noteworthy that the Fed recently decided to pause its rate-hiking cycle but hinted at the potential need for interest rates to rise by up to 50 basis points by year-end. Fed Chair Jerome Powell reiterated the intention to increase rates, albeit cautiously, to combat high inflation. Powell emphasized that the Fed does not anticipate rate cuts in the near future and will wait until they are confident that inflation is moving towards the 2% target.

Furthermore, the Reserve Bank of New Zealand (RBNZ) has signaled the conclusion of its most aggressive hiking cycle since 1999, warranting caution before placing bullish bets on the NZD/USD pair. In the absence of significant macroeconomic data from the US, it is prudent to wait for strong confirmation of sustained buying momentum to ensure that the recent sharp retreat from the mid-0.6200s or the monthly swing high has reached its conclusion. Market participants will closely monitor the release of the US Core PCE Price Index, the Fed's preferred inflation gauge, on Friday, as it could potentially impact the market sentiment.