• NZD/USD is holding near the 0.6200 psychological area.
• Fed sentiment remained the main driving force.

NZD/USD dropped sharply on Friday as the US Dollar resurged as a hawkish narrative surrounding the Federal Reserve resurfaced. NZD/USD dropped to a low of 0.6195 from a high of 0.6314 and is stabilizing around 0.62 the figure currently. 

On Friday, Federal Reserve´s Governor Christopher Waller said that despite a year of aggressive rate increases, US central bankers "haven't made much progress" in returning inflation to their 2% target and need to move rates higher still. However, other Fed officials crossed the wires with Atlanta Fed President Raphael Bostic saying one more quarter-percentage-point interest rate hike can allow the Fed to end its tightening cycle while Chicago Fed President Austan Goolsbee said that a US recession is certainly feasible. Consequently, Fed funds futures traders are pricing in an 81% probability that the Fed will hike by an additional 25 basis points at its May 2-3 meeting.

Analysts at ANZ Bank explained that given consumer resilience, markets are now putting an 85% probability of a 25bp rate rise in May and expectations for June firmed as well. ´´Our baseline view is for two more 25bp rate hikes and we continue to expect that if economic data does not start to weaken soon, the market will need to reprice for no rate cuts in the second half of this year. A solid advance Q1 GDP release now seems likely,´´ the analysts said. 

Meanwhile, on the domestic front, the analysts said that ´´the hurdle for an upward surprise in non-tradable inflation on Thursday is high, but MPR-signalled upward revisions to the RBNZ’s near-term inflation outlook imply that any wins on the starting point may be offset in the RBNZ’s May MPS projections and OCR decision. ´´

The Financial Times reported on Sunday that the Bank of England is considering a major overhaul of its deposit guarantee scheme, including boosting the amount covered for businesses and forcing banks to pre-fund the system to a greater extent to ensure faster access to cash when a lender collapses.

GBP/USD update

GBP/USD edged lower on Friday but remained close to a 10-month high and had been supported by an improving appetite for risk. GBP/USD ended 0.88% lower and fell from a high of 1.2546 to a low of 1.2398. It will be a big week of British data that could provide clues on the outlook for monetary policy.

Bloomberg has put out an article that states a quarter-point increase in interest rates is the most the European Central Bank has to deliver at its next meeting, Governing Council member Mario Centeno said, playing down concerns over the strength of underlying inflation.

EUR/USD update

EUR/USD was down 0.48% to 1.0993 on Friday after earlier hitting 1.10755, its highest in around a year.

• AUD/USD bears test trendline support that guards against a break to test 0.6500 as illustrated above. 
• Fed sentiment and RBA in focus as the driver.

AUD/USD fell from resistance by some 1% on Friday with the US Dollar moving up from a one-year low as measured by the DXY index as traders derisked on inflation concerns. AUD/USD dropped between a high of 0.6805 and a low of 0.6695.  

It's a mixed bag of sentiment out there with US data disappointing yet hawks and US Dollar bulls finding elements from within to support a hawkish narrative surrounding the Federal Reserve. Fed´s Governor Christopher Waller said on Friday that despite a year of aggressive rate increases, US central bankers "haven't made much progress" in returning inflation to their 2% target and need to move rates higher still.

Additionally, March Retail Sales components were not as weak as some economists had feared. Core retail sales, which correspond most closely with the consumer spending component of gross domestic product, slipped 0.3% last month. However, despite March's fall, the gains in January and February put consumer spending firmly on track to accelerate in the first quarter. This led to the greenback bouncing back to life with the DXY adding 0.57% on the day at 101.53, after falling to 100.78, the lowest since last April. 

Other Fed officials also crossed the wires with Atlanta Fed President Raphael Bostic saying one more quarter-percentage-point interest rate hike can allow the Fed to end its tightening cycle while Chicago Fed President Austan Goolsbee said that a US recession is certainly feasible. Consequently, Fed funds futures traders are pricing in an 81% probability that the Fed will hike by an additional 25 basis points at its May 2-3 meeting.

Meanwhile and domestically, traders will look to the Reserve Bank of Australia´s minutes. Analysts at TD Securities noted that in recent speeches, governor Phillip Lowe and deputy governor Michele Bullock made it clear that the RBA wanted to pause to assess the impact of the rapid rate hikes and the economic outlook. ´´Thus, we expect the Minutes to follow closely to their speeches and don't expect any surprises. Again, the Minutes will emphasize the "long and variable lags" of monetary policy and the uncertainty from the mortgage roll-off.´´

Analysts at ANZ Bank explained that resilience and green shoots were the themes of this week’s data prints across the labour market, business conditions and housing. ´´We see risks to inflation as tilted up and, in our CPI preview, forecast trimmed mean, non-tradables and services inflation will all annualise above 6% in Q1. But we don’t think this will be enough for the RBA to move in May.´´

AUD/USD technical analysis

The bears have moved in on trendline support that guards against a break to test 0.6500 as illustrated above.