NZD/USD Holds Firm Above Key Support Level of 0.5860

During Friday’s European session, the NZD/USD pair exhibited a sideways trend just below the 0.5900 level, rebounding notably from the critical support level of 0.5860.

The New Zealand dollar (Kiwi) experienced a resurgence as demand for risk-associated currencies strengthened amidst economists’ warnings about persistent global inflationary pressures. Speculation mounted that central banks, besides the Federal Reserve (Fed), may delay their plans for interest rate cuts to prevent a resurgence in inflation. Initially, market expectations were focused solely on the Fed initiating interest rate reductions later this year due to ongoing higher price pressures and robust labor market demand.

Market participants anticipate the Reserve Bank of New Zealand (RBNZ) to pivot towards rate cuts starting from November, following data indicating that New Zealand’s Q1 inflation grew in line with estimates. Price pressures rose by 0.6%, matching expectations and surpassing the previous reading of 0.5%.

Meanwhile, the US Dollar Index (DXY) saw a slight decline to 106.10. However, the near-term outlook for the greenback remains bullish, as the Fed maintains its stance on keeping interest rates at elevated levels until inflation reaches the desired rate of 2%. Traders currently anticipate the Fed to commence interest rate reductions from the September meeting onwards.

Technically, the NZD/USD pair exhibits a Descending Triangle chart pattern, characterized by a notable contraction in volatility. The downward-sloping border of the pattern is traced from the April 12 high near 0.6000, while the horizontal support is established from the April 16 low at 0.5860.

At present, the Kiwi asset is attempting to surpass the 20-period Exponential Moving Average (EMA) located around the 0.5900 level.

The 14-period Relative Strength Index (RSI) has shown a sharp recovery above the 40.00 mark. However, a downside bias persists until the RSI surpasses the 60.00 threshold.

A potential downside scenario may unfold if the pair breaches below the April 16 low at 0.5860, potentially leading to a decline towards the September 8, 2023 low at 0.5847, followed by the psychological support level of 0.5800.

Conversely, a recovery above the March 18 high at 0.6100 could propel the pair towards the March 12 low at 0.6135. Further upside momentum could see the asset target the February 9 high around 0.6160.

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