NZD/USD Buyers Advance Ahead of the Fed

Highlight

• NZD/USD rose in Tokyo as investors eyed the Fed.

• The Fed is the main event after the release of the main US CPI on Tuesday.

NZD/USD was 0.17% higher at the time of writing after rising from a low of 0.6144 to a new high of 0.6161 in Tokyo market trading. The focus is on the Federal Reserve today following Tuesday's inflation report, which showed stable core inflation.

Data shows that the US Consumer Price Index rose a slight 0.1% last month after rising 0.4% in April, the core CPI rose 0.4% in May, rising by the same margin for three consecutive months. However, the Greenback trimmed the initial weakening because this figure is too high to match the Fed's 2% inflation target, so there is still a possibility that the FOMC will allow another 25-bp hike at the outcome of the FOMC meeting.

''The kiwi rose slightly this morning, and despite some ups and downs yesterday due to the US CPI data, the foreign exchange market is much more volatile than the bond market, with the 10-year US government bond trading in the 15bp range yesterday,'' analysts at ANZ Bank explains.

Although US bond yields are now back near their late-May highs, that has not helped the USD, partly because while the data has reinforced market calls that the Fed will 'miss' tomorrow, it also suggests that we will see more tightening. Later, and that will ultimately slow down the US economy,' the analysts added.

Regarding the Fed, the analysts at TD Securities said that they'maintain our long-held view that the Fed will tighten interest rates by 25bp in June to a range of 5.25%-5.50%. If the Fed decides to 'skip' the June meeting, we expect the decision to be accompanied by heavy communication , signalling a possible hike in July.

“Whether the Fed raises interest rates in June or July (or skips both), the USD is focused on nearing the end of the tightening campaign, which creates a risk of USD pullback in Semester 2,” said the analysts.