New Zealand Dollar advances as ANZ outlook jumps

NZD/USD gains ground for the second successive day, trading around 0.5650 during the European hours on Tuesday. The New Zealand Dollar (NZD) maintains its upward momentum, drawing strong support from a sharp rebound in domestic sentiment.

The key catalyst was New Zealand’s ANZ Business Outlook Index, which surged to 36.6 in June from 10.0 in the previous month. This marked the highest confidence reading since February, providing the Kiwi pair with solid near-term backing. Additionally, a recent pullback in global oil prices following a US-Iran nuclear agreement helped ease immediate, near-term inflation anxieties across the market.

However, the NZD/USD pair may face uphill battles moving forward as the broader economic fallout from the earlier energy shock continues to linger. Highlighting these underlying vulnerabilities, New Zealand's four major banks all forecast the domestic economy to contract in the second quarter. This economic strain has forced market participants to scale back their expectations for aggressive monetary tightening by the Reserve Bank of New Zealand (RBNZ).

Markets are now pricing in just a 66% chance of a July rate hike, down significantly from over 80% a few weeks earlier, and anticipate only two interest rate increases this year rather than the previously expected three.

The upside of the NZD/USD pair could be restrained as the US Dollar (USD) receives support from growing expectations of a hawkish Federal Reserve interest rate path. According to the CME FedWatch tool, traders are now pricing in above 60% probability of a Fed interest rate hike by September.

Traders are looking ahead to Wednesday's US ADP employment data and Thursday's Nonfarm Payrolls (NFP) report for clues on the Federal Reserve's next policy moves. A stronger-than-expected jobs report could reinforce the Fed's "higher-for-longer" interest rate stance, potentially dampening appetite for risk-sensitive assets.