NZD/USD holds recovery to 0.5900, strong US Dollar limits upside

• NZD/USD recaptures 0.5900 as the RBNZ is expected to pivot to rate cuts after the Fed.
• The USD Index moves higher as the strong US economic outlook allows the Fed to maintain interest rates higher.
• Fed Bostic expects that conditions for rate cuts won’t be favorable towards the end of the year.

The NZD/USD pair holds onto gains around 0.5900 in Monday’s early American session. The Kiwi asset clings to gains as ebbing risks of widening Middle East conflict has improved demand for Asian currencies.

The market sentiment turns upbeat after Iran said they are not planning any immediate retaliation to the limited attack of Israel on Isfahan. No further escalation in the conflict between Iran and Israel has dented bullions' demand.

The S&P 500 opens on a positive note, exhibiting improved risk appetite among market participants. 10-year US Treasury yields jump to 4.64% as Federal Reserve (Fed) policymakers argue that the current restrictive monetary policy framework is appropriate given strong labor demand and stubbornly higher price pressures.

The US Dollar Index (DXY) jumps to 106.30 as the strong United States economic outlook due to robust consumer spending and tight labor market conditions have made Fed policymakers comfortable with interest rates remaining at their current levels.

Last week, Atlanta Fed President Raphael Bostic said the progress in inflation declining towards the 2% target will be slower than expected, and conditions for rate cuts won’t be favorable for the central bank towards the end of the year. Bostic added he is comfortable being patient and not madly rushing for rate cuts because labor demand is robust and wage growth remains resilient.

European FX is underperforming against the US Dollar due to expectations that the Bank of England (BoE) and the European Central Bank (ECB) will pivot to rate cutes earlier than the Fed. The Reserve Bank of Australia (RBA) and Reserve Bank of New Zealand (RBNZ) are expected to reduce interest rates later than the Fed. Traders are pricing in the November meeting when the RBNZ will start lowering borrowing rates, and no rate cuts are expected by the RBA this year.