NZD/USD hovered around 0.5860 on Thursday, down more than 1% on the day, as the US Dollar strengthened after comments from Federal Reserve officials. Dallas Fed President Lorie Logan said inflation is returning too slowly to the Fed’s 2% target and indicated higher interest rates may be required later this year, adding that financial conditions remain accommodative, the labour market is stable and activity is resilient. Markets are now focused on Friday’s US Nonfarm Payrolls for further direction on policy expectations.
The dollar also drew support from US data, with the ISM Services PMI rising to 54.5 in May from 53.6 in April, tempering expectations of near-term rate cuts. On a four-hour view, NZD/USD traded at 0.5864 and stayed below the 100-period SMA at 0.5892 and the 20-period SMA at 0.5929, while the RSI sank into oversold territory near 27. Resistance sits at 0.5866, then 0.5870 and 0.5880, while support is seen at 0.5857; a break lower would point to further weakness.
Fed Hawkishness and Dollar Strength
With Fed officials warning that higher interest rates could be needed, we are adjusting our strategy for a stronger US Dollar. Inflation is proving stubborn, so the central bank may keep its policy tight for longer than the market previously expected. This hawkish stance is the primary driver for our trades in the coming weeks.
The strong ISM Services PMI of 54.5 in May confirms the US economy’s resilience, which supports the dollar. We also see that core inflation, according to the latest PCE data from late May, is still hovering around 2.8%, well above the Fed’s 2% goal. This combination of strong growth and sticky inflation justifies betting on continued dollar strength.
Trading the NZD/USD Ahead of Payrolls
We are positioning for Friday’s Nonfarm Payrolls report, which will be a major market mover. Expectations are for job growth to be around 190,000, and if the actual number comes in higher, it will almost certainly lock in the Fed’s hawkish stance. We are therefore considering buying short-term options to profit from the expected volatility.
We see the NZD/USD pair as a clear way to play this theme, as it is already showing significant weakness. While the RSI is oversold near 27, suggesting a possible small bounce, we would view any rally towards the 0.5890 resistance level as an opportunity to sell. A decisive break below the 0.5857 support level would be our signal to add to bearish positions.
