NZD/USD struggles to break above 0.6500 amid modest USD strength

• NZD/USD returns modest intraday gains on the appearance of some buying around the USD.
• Upbeat US macroeconomic data on Thursday feeds hawkish expectations from the Fed and supports the dollar.
• The positive risk tone acts as a headwind for the dollar and provides support for the risk-sensitive NZD.

The pair NZD/USD continues to struggle to break above the psychological level of 0.6500 and oscillates between tepid gains and small losses on Friday. The pair is trading around the 0.6485-0.6480 zone during the European session and remains within a known range.

The modest US dollar strength is seen as a key factor acting as a headwind for NZD/USD, although the generally positive tone around equity markets limits downside for the risk-sensitive NZD. The dollar gets some support from mostly upbeat US macroeconomic data released on Thursday, which supports the view that Fed to stay hawkish for longer. This leads to a further recovery in US Treasury yields and supports the dollar.

Strong economic indicators, meanwhile, boost investor confidence and act as a headwind for the safe-haven USD. In addition, the markets remain convinced that the US central bank will slow down the pace of monetary policy tightening. The CME’s FedWatch tool points to a nearly 90% probability of a 25 basis point rate hike at the next FOMC meeting next week. This helps cap the dollar and supports the NZD/USD pair.

Traders may also be reluctant to open aggressive positions and would prefer to wait for the release of the US Core PCE Price Index, the Fed’s preferred indicator of inflation. This, along with US bond yields and sentiment Risk in general could influence the USD and give the NZD/USD pair some momentum. In the meantime, the fundamental background warrants some caution before confirming that the pair has topped out and positioning for any significant corrective pullback.

Technical levels to watch