NZD/USD bounces off one-week low, trades with modest losses above mid-0.6200s

The NZD/USD pair fades an intraday bullish spike to the 0.6315 region and drops to a one-week low during the early European session on Wednesday. Spot prices, however, manage to recover a few pips in the last hour and currently trade just above mid-0.6200s, down just over 0.15% for the day.

The New Zealand Dollar (NZD) did get a minor lift following the release of stronger domestic consumer inflation figures, which showed that the headline CPI rose by 1.1% during the second quarter as compared to the 1% estimated. Moreover, the yearly rate decelerated less than expected to 6% during the reported period and forced investors to price in a more hawkish Reserve Bank of New Zealand (RBNZ). Apart from this, the prevalent risk-on environment pushed the NZD/USD pair higher, though concerns over slowing economic growth in China.

It is worth recalling that data released earlier this week showed that the economic growth in China decelerated substantially in the second quarter and Retail sales - a gauge of consumption - slowed sharply in June. This, in turn, acts as a headwind for antipodean currencies, including the Kiwi, which, along with a goodish pickup in the US Dollar (USD) demand, drag the NZD/USD pair lower for the fourth straight day. Doubts that the Federal Reserve (Fed) will commit to a more dovish policy stance prompt some short-covering around the USD.

The US Core Retail Sales - excluding automobiles, gasoline, building materials and food services - showed more resilience in June and fueled speculations that the Fed might stick to its forecast for a 50 bps rate hike this year. The markets, however, have been pricing out the possibility of any further rate hikes after the widely expected 25 bps lift-off in July. This is reinforced by a further steep decline in the US Treasury bond yields, which holds back the USD bulls from placing aggressive bets and assists the NZD/USD pair to bounce off the 0.6225 area.

This makes it prudent to wait for some follow-through selling before positioning for an extension of the recent retracement slide from levels just above the 0.6400 mark, or the highest level since early February touched last week. Market participants now look forward to the US housing market data - Building Permits and Housing Starts - for some impetus later during the early North American session. This, along with the US bond yields and the broader risk sentiment, might influence the USD and produce short-term opportunities around the NZD/USD pair.

Technical levels to watch