NZD/USD has trimmed its intraday losses and is currently hovering around 0.6150 during the Asian session on Wednesday. The US Dollar (USD) is facing pressure as US Treasury yields continue to dip ahead of the US Consumer Price Index (CPI) data, set to be released later during the North American trading session. This inflation report is anticipated to provide new insights into the likelihood of the Federal Reserve (Fed) reducing interest rates in September.

US Dollar Faces Challenges Amid Declining Yields

The US Dollar Index (DXY), which tracks the greenback’s value against a basket of six major currencies, has paused its three-day winning streak. Currently, the DXY trades around 101.40, while US Treasury bond yields for 2-year and 10-year notes stand at 3.57% and 3.62%, respectively.

Last week’s US labor market report introduced uncertainty about the potential for a more aggressive rate cut by the Federal Reserve in September. According to the CME FedWatch Tool, markets expect at least a 25 basis point (bps) rate cut, with the probability of a larger 50 bps cut decreasing to 31.0%, down from 38.0% a week prior.

Impact of China’s Deflation on the Kiwi Market

Morgan Stanley’s Chief China Economist, Robin Xing, recently commented on China’s deflation concerns, indicating that the country is likely in the second stage of deflation. He compared Japan’s deflationary period, noting that prolonged deflation could require China to implement substantial stimulus measures. As China is a close trading partner of New Zealand, any shifts in China’s economy could significantly impact the Kiwi markets.

UOB Group FX strategists Quek Ser Leang and Peter Chia observed that the New Zealand Dollar (NZD) may drop below 0.6115. However, they believe that support at 0.6085 is unlikely to be breached. They further noted that as long as the NZD remains under 0.6220, a break below 0.6150 remains possible.