Forex Market: NZD/USD steadies after biggest drop in two weeks, Fed Minutes hint at change in forward guidance for policy

New Zealand Dollar registered its biggest single-day drop against its US counterpart since August 7th on Wednesday after the Minutes from the Federal Reserve’s July meeting provided little clues over whether a more dovish policy shift can be observed in September.

NZD/USD remained mostly flat in early European session on Thursday.

Many have speculated that the US central bank may adopt an average inflation target in an attempt to drive inflation above 2% for some time, or impose caps on government bond yields.

However, the Minutes offered no clarity on those matters. The document revealed “a number of participants noted that providing greater clarity regarding the likely path of the target range for the federal funds rate would be appropriate at some point.” Yet, no details or time frame were disclosed.

But the statement above can be considered as a hint at a possible adjustment of the monetary policy outlook over the upcoming months.

In addition, most policy makers “judged that yield caps and targets would likely provide only modest benefits in the current environment.”

“Traders were hoping (the minutes) would cement a clear consensus in the Fed’s ranks for a series of key changes in the 18 September meeting,” Chris Weston, head of research at Pepperstone, said.

“(But) there seems little consensus in the Fed collective to adopt an inflation-targeting regime, which is what so many have positioned for.”

As of 6:42 GMT on Thursday NZD/USD was inching down 0.03% to trade at 0.6554, while moving within a daily range of 0.6545-0.6571. The major pair advanced 2.70% in July, which marked its fourth straight month of gains. NZD/USD has retreated 1.06% so far in August.

In terms of economic calendar, at 12:30 GMT today the US Labor Department will report on jobless claims. The number of people in the country, who filed for unemployment assistance for the first time during the business week ended August 14th, probably eased to 925,000, according to market expectations, from 963,000 in the preceding week. The latter has been the lowest number of claims since the beginning of the COVID-19 pandemic and suggests that the US labor market may be on the path of recovery.

Also at 12:30 GMT, the Federal Reserve Bank of Philadelphia will report on manufacturing activity in the area. The Philadelphia Fed Manufacturing Index probably decreased to 21.0 in August, according to market expectations, from a level of 24.1 in July.

Bond Yield Spread

The spread between 1-year New Zealand and 1-year US bond yields, which reflects the flow of funds in a short term, equaled 10.9 basis points (0.109%) as of 6:15 GMT on Thursday, or unchanged compared to August 19th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.6587
R1 – 0.6620
R2 – 0.6684
R3 – 0.6717
R4 – 0.6750

S1 – 0.6523
S2 – 0.6490
S3 – 0.6426
S4 – 0.6362