• Manufacturing activity weakened for the eighth month, weighing on the US Dollar.
• Investors expect a July rate hike by the Fed despite weak data, while chances of a November hike decline.
• The New Zealand Dollar (NZD) is expected to take cues from the Reserve Bank of Australia’s (RBA) upcoming monetary policy decision, with expectations of a 25 bps rate increase to 4.35%.

NZD/USD advances as the third quarter, the second half of the year begins, due to worse-than-expected data in the United States (US) reignited recession fears, as business activity slows down. That, alongside a deep inversion of the US 10s-2s yield curve, signs traders are bracing for a recession amidst a cycle of central banks increasing borrowing costs to curb inflation. The NZD/USD is trading at 0.6156 after hitting a daily low of 0.6115.

Worse-than-expected US data reignited recession worries, supports the NZD/USD; yield curve inversion raises concerns

The Institute for Supply Management (ISM) in the US revealed that manufacturing activity weakened further in June, to 46.0 below May’s 46.9, missing estimates of 47. According to the report, it’s the eighth straight month of losses. The data showed that prices paid in the manufacturing front are deflating, contrarily to services, which remained higher due to stronger wage growth from a tight labor market.

Despite weaker-than-expected data, investors see the US Federal Reserve (Fed) raising rates in July, as the CME FedWatch Tool odds for a 25 bps lift stood at around 87%. However, chances for November slipped to 33% after the data.

NZD/USD traders should be aware that recent data pushed aside woes for a recession, but last Friday’s US inflation report tempered speculations the Fed will hike twice toward the end of the year. That weighed on the greenback, which according to the US Dollar Index (DXY), stays firm at 102.979, even though yields continued to drop.

The US yield curve inverted the most since March of 2023, at -1.078%, as the US 2-year yield 4.923%, while the 10-year yields 3.843%, a sign that market players expect further Fed tightening would decelerate the economy, and it might tip it into a recession.

Meanwhile, the New Zealand economic agenda was light, with no data reported. However, the New Zealand Dollar (NZD) is expected to get cues from the Reserve Bank of Australia (RBA) monetary policy decision. On Tuesday, the RBA is expected to raise rates by 25 bps to 4.35%, though odds are 50%, according to a Reuters poll, with 16 of 31 economists expecting the increase, while the rest foresee a pause