• NZD/USD treads waters to recover from the losses registered on Tuesday.
• Greenback’s recovery can be attributed to improved US bond yields and market caution ahead of US inflation data.
• Investors are expecting the Fed to continue the tightening of monetary policy through the end of the year 2023.

NZD/USD holds ground near 0.5900 during the European session on Wednesday, struggling to recover from the previous day’s losses. The rebound in US Dollar (USD) is contributing support in undermining the potential of the NZD/USD pair.

US Dollar Index (DXY), which measures the performance of the US Dollar (USD) against a basket of the other major six currencies, retraces its recent losses. The spot price trades higher around 104.70. This upward movement can be attributed to improved United States (US) Treasury yields and market caution ahead of the release of inflation data from the United States (US).

The US Consumer Price Index (CPI) is expected to show a monthly improvement of 0.5%, an increase from the previous reading of a 0.2% rise. The core CPI figure, which excludes volatile food and energy prices, is anticipated to remain stable at 0.2%. Economic data and market sentiment can play a significant role in shaping the performance of the US Dollar (USD).

These inflation figures may provide a more accurate insight into inflation trends in the US economy and can have a substantial impact on market sentiment and trading decisions. It could reinforce the relative strength of the Greenback against the New Zealand Dollar (NZD) and affect trading dynamics in the Kiwi pair.

An increase in inflation, especially one that exceeds expectations, could indeed strengthen the prevailing hawkish sentiment surrounding the US Federal Reserve (Fed). It may lead to expectations of more aggressive monetary policy actions.

The market is anticipating that the Fed will continue to tighten monetary policy by implementing another 25 basis points (bps) hike before the end of 2023. Furthermore, the USD bulls are enthusiastic about the prospect of interest rates remaining at higher levels for an extended period.

This anticipation reflects the likelihood of a more hawkish monetary stance by the Fed through the end of the year, which can contribute to the strength of the USD and shape market sentiment.