NZD/USD delivers V-shape recovery, climbs to near 0.6200 as US Dollar corrects

• NZD/USD resumes upside journey as US Dollar falls on backfoot.
• Fed policymakers need more conviction that inflation will decline to their desired target of 2%.
• The RBNZ is expected to keep its OCR unchanged at 5.50%.

The NZD/USD pair delivers a solid recovery from the round-level resistance of 0.6200 in the late European session on Friday. The Kiwi asset strengthens as the US Dollar has come under pressure despite the Federal Reserve (Fed) preferring to delay rate cuts. Fed policymakers are worried that premature rate cuts could flare up inflation again.

S&P500 futures trade slightly positive ahead of the US opening, indicating upbeat market sentiment. The US Dollar Index (DXY), which measures the value of the Greenback against six rival currencies, extends corrects to 103.77. 10-year US Treasury yields have dropped sharply to 4.30%.

On Thursday, Fed policymakers said they need more confidence that inflation will converge to 2% before considering rate cuts. Fed Governor Christopher Waller said there is no need to hurry for rate cuts. The risks of reducing interest rates too soon are higher than delaying them. Fed policymakers are uncertain about inflation declining to the 2% target after the release of the surprisingly stubborn Consumer Price Index (CPI) data for January.

Meanwhile, the New Zealand Dollar will be guided by market expectations of the monetary policy announcement by the Reserve Bank of New Zealand (RBNZ) scheduled for next week. The RBNZ is expected to keep its Official Cash Rate (OCR) unchanged at 5.50%.

While high price pressures are leaving no room for RBNZ policymakers to reduce key lending rates, domestic economic indicators demand liquidity stimulus. The Q4 Retail Sales data, released this week, contracted sharply by 1.9% against a 0.8% decline in the third quarter of 2023.