Forex Market: NZD/USD trades near three-week highs while heading for fifth month of gains, Fed signals average inflation targeting

NZD/USD kept trading in proximity to Thursday’s three-week high in early European session on Friday, after Fed Chair Jerome Powell announced a new approach aimed at job creation and based on average inflation targeting.

In his speech at the Jackson Hole virtual symposium yesterday the Federal Reserve Chairman said the central bank would aim to achieve an average inflation of 2%, thus, allowing the rate to run moderately above or below that objective for some time to support economic recovery and employment. At the same time, interest rates will be kept at lower levels for longer despite a rise in inflation.

The yield on US 10-year government bonds rose to levels not seen since June 16th after Powell’s announcement, while the US Dollar registered a two-week high against Japan’s Yen.

“It’s clear we saw a ‘buy the rumour, sell the fact’ play out, notably in U.S. Treasuries, which have led broad market moves,” Chris Weston, head of research at Pepperstone, said.

“The move higher in Treasury yields post-Powell did promote a USD rally, although we find it flat on the day, with a mixed picture across the well-traded FX pairs.”

Meanwhile, in terms of macro data, a business survey showed New Zealand households’ confidence had worsened in August. ANZ-Roy Morgan NZ Consumer Confidence Index decreased to a level of 100.2 in August from 104.3 in July.

As of 6:54 GMT on Friday NZD/USD was gaining 0.53% to trade at 0.6673, after earlier touching an intraday high at 0.6675, or a level it achieved yesterday and also its strongest since August 7th (0.6691). The major pair has erased earlier losses for the month and is now up 0.74%, while being poised for a fifth straight monthly advance.

On today’s economic calendar, at 12:30 GMT the US Bureau of Economic Analysis is expected to report on core PCE inflation for July. The Core Personal Consumption Expenditure (PCE) Price Index, which does not include prices of food and energy and represents the Federal Reserve’s preferred measure of inflation, is expected to increase 1.2% year-on-year in July. Annual core PCE inflation was reported at 0.9% in June, which has been the 17th consecutive month when core inflation was below Fed’s 2% target.

Personal income probably decreased 0.2% in July from a month ago, while personal spending probably rose at a monthly rate of 1.5%, according to market expectations.

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 4.9 basis points (0.049%) as of 6:15 GMT on Friday, down from 6.9 basis points on August 27th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.6638
R1 – 0.6675
R2 – 0.6713
R3 – 0.6750
R4 – 0.6788

S1 – 0.6600
S2 – 0.6563
S3 – 0.6525
S4 – 0.6488

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