NZD/USD holds above 0.5950 as US recession fears mount

• NZD/USD rebounds to near 0.5955 in Tuesday’s early Asian session.  
• Traders raise pressure on the Fed to take more aggressive rate action. 
• The interest rate cut by the RBNZ in August cannot be ruled out, said BNZ analysts. 

The NZD/USD pair recovers some lost ground around 0.5955 after retracing to near 0.5850 during the early Asian session on Tuesday. The softer US Dollar (USD) broadly provides some support to the pair. The risk sentiment might influence the markets amid concerns over the likelihood that the US economy might tip into recession. 

Data released on Monday revealed that the US ISM Service Purchasing Managers Index (PMI) surprised to the upside and returned to the expansion zone, rising to 51.4 in July from 48.8 in June. This figure came in better than the estimation of 51.0. However, the S&P Global Composite PMI was worse than expected, declining to 54.3 in July versus 55 prior. A series of disappointing US economic data fuelled the fear of a looming US recession, which triggered the sell-off across the financial markets. 

The Federal Reserve (Fed) kept interest rates at 5.25% to 5.5% after its July meeting last week. Traders are now raising bets on emergency rate cuts. JPMorgan chief economist Michael Feroli noted that there is a "strong case to act before the next scheduled policy meeting on September 17-18. The markets are now pricing in nearly 85% chance that the Fed will cut the rate by 50 basis points (bps) in September, up from only 11.5% last week, according to the CME FedWatch Tool. This, in turn, exerts some selling pressure on the Greenback broadly and creates a tailwind for the NZD/USD pair. 

On the Kiwi front, BNZ analysts said that while they see the first Official Cash Rate (OCR) cut by the Reserve Bank of New Zealand (RBNZ) in November, they reiterated that they wouldn’t rule out an earlier start to OCR cuts, including at the Bank’s August meeting, which they see as live. 

Traders will monitor the release of the Chinese July Consumer Price Index (CPI) on Friday for fresh impetus, which is estimated to show an increase of 0.4% YoY in July. The weaker-than-expected reading or any signs of an economic slowdown in China could undermine the Kiwi as China is a major trading partner of New Zealand.