• NZD/USD retreats from a four-month high, touched in reaction to hot NZ inflation this Friday.
• A modest USD uptick also weighs on spot prices, though the downside potential seems limited.
• The divergent RBNZ-Fed policy expectations might continue to lend support to the currency pair.

The NZD/USD pair extends its steady intraday descent from the 0.5930 area, or a four-month high touched earlier this Friday, and slides to a fresh daily low during the first half of the European session. Spot prices currently trade just below the 0.5900 mark, down around 0.15% for the day, though any meaningful depreciation seems elusive amid a supportive fundamental backdrop.

Statistics New Zealand reported that the annual consumer inflation accelerated in the fourth quarter to 3.1%, above the central bank's target range. The hot inflation data reaffirmed expectations that the Reserve Bank of New Zealand (RBNZ) could raise interest rates later this year. Apart from this, a generally positive tone around the equity markets should act as a tailwind for the risk-sensitive Kiwi and limit the downside for the NZD/USD pair.

However, a modest US Dollar (USD) uptick prompts some profit-taking amid overbought conditions and following this week's sharp rise of nearly 200-pips. However, bets that the US Federal Reserve (Fed) will lower borrowing costs two more times this year might cap the attempted USD recovery from the vicinity of a two-week low. Moreover, the divergent RBNZ-Fed outlooks should contribute to limiting deeper losses for the NZD/USD pair.

Even from a technical perspective, the overnight breakout through the very important 200-day Simple Moving Average (SMA) favors bullish traders. Hence, it will be prudent to wait for strong follow-through selling before confirming that spot prices have topped out in the near-term and positioning for a corrective slide. Traders now look forward to the release of the flash US PMIs, which would drive the USD and provide some impetus to the NZD/USD pair.