NZD/USD extends recovery to 0.5900, US dollar strength limits upside

• NZD/USD reclaims 0.5900 as RBNZ is expected to lean towards rate cuts after the Fed.
• The USD index rises as the strong US economic outlook allows the Fed to keep interest rates higher.
• Raphael Bostic, president of the Atlanta Fed, expects that the conditions for rate cuts will not be favorable towards the end of the year.

The NZD/USD pair is holding on to gains around 0.5900 in the early hours of the American session on Monday. NZD/USD is holding on to gains as declining risks of escalating conflict in the Middle East have improved demand for Asian currencies.

Market sentiment turns optimistic after Iran said it is not planning any immediate retaliation to Israel's attack on Isfahan. The absence of a new escalation in the conflict between Iran and Israel has reduced the demand for bullion.

The S&P 500 opens positively, showing increased risk appetite among market participants. The yield on the 10-year US Treasury bond soars to 4.64%, as Federal Reserve (Fed) officials maintain that the current restrictive monetary policy framework is appropriate given the strong demand for labor and the persistent upward price pressures.

The US Dollar Index (DXY) jumps to 106.30 as the strong US economic outlook, due to strong consumer spending and tense labor market conditions, has made Fed policymakers comfortable with the maintenance of interest rates at their current levels.

Last week, Atlanta Fed President Raphael Bostic said inflation's progress toward the 2% target will be slower than expected, and that the conditions for cutting rates will not be favorable for the central bank. towards the end of the year. Bostic added that he feels comfortable being patient and not rushing madly to cut rates because demand for labor is robust and wage growth remains resilient.

European currencies are underperforming the US dollar on expectations that the Bank of England (BoE) and the European Central Bank (ECB) will move towards rate cuts ahead of the Fed. The Bank of The Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ) cut interest rates later than the Fed. Traders are pricing in the November meeting, when the RBNZ will begin lowering interest rates, and no rate cuts are expected from the RBA this year.