NZD/USD moves below 0.6300 after trimming daily gains, awaits Fedspeak

• NZD/USD may lose ground due to risk-off mood amid rising Middle-East tensions.
• The US Dollar gains ground due to the waning likelihood of a bumper Fed rate cut in November.
• The New Zealand Dollar may struggle as the RBNZ is expected to deliver a 50 basis point cut next week.

NZD/USD pares daily gains but holds some gains, trading around 0.6290 during the early European hours on Wednesday. The upside of the risk-sensitive Kiwi pair could be restrained due to rising risk aversion sentiment amid escalating geopolitical tensions in the Middle East.

Iran launched over 200 ballistic missiles at Israel, prompting Prime Minister Benjamin Netanyahu to vow retaliation against Tehran for the Tuesday attack. In response, Iran warned that any counterstrike would lead to "vast destruction," heightening concerns of a broader conflict, per Bloomberg.

Earlier this week, Federal Reserve (Fed) Chairman Jerome Powell. Powell said that the central bank will lower its interest rate gradually over time. The US Dollar receives support from the waning likelihood of an aggressive rate cut by the Fed in November.

The CME FedWatch Tool indicates that markets are assigning a 62.7% probability to a 25 basis point rate cut by the Federal Reserve in November, while the likelihood of a 50-basis-point cut is 37.3%, down from 57.4% a week ago.

The Reserve Bank of New Zealand's (RBNZ) monetary policy meeting is set for next week, and markets have already priced in a strong likelihood of a 50 basis point interest rate cut. HSBC analysts now expect the RBNZ to lower its cash rate by 50 basis points in both October and November, revising their earlier forecast of 25 basis point cuts for each month.

The Bank of New Zealand (BNZ) is also predicting a 50 basis point cut from the RBNZ next week. "In our view, the disinflationary data we've received will be a key factor, prompting the RBNZ to accelerate its easing process," they stated.

RBNZ FAQs

What is the Reserve Bank of New Zealand?

The Reserve Bank of New Zealand (RBNZ) is the country’s central bank. Its economic objectives are achieving and maintaining price stability – achieved when inflation, measured by the Consumer Price Index (CPI), falls within the band of between 1% and 3% – and supporting maximum sustainable employment.

How does the Reserve Bank of New Zealand’s monetary policy influence the New Zealand Dollar?

The Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee (MPC) decides the appropriate level of the Official Cash Rate (OCR) according to its objectives. When inflation is above target, the bank will attempt to tame it by raising its key OCR, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the New Zealand Dollar (NZD) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken NZD.

Why does the Reserve Bank of New Zealand care about employment?

Employment is important for the Reserve Bank of New Zealand (RBNZ) because a tight labor market can fuel inflation. The RBNZ’s goal of “maximum sustainable employment” is defined as the highest use of labor resources that can be sustained over time without creating an acceleration in inflation. “When employment is at its maximum sustainable level, there will be low and stable inflation. However, if employment is above the maximum sustainable level for too long, it will eventually cause prices to rise more and more quickly, requiring the MPC to raise interest rates to keep inflation under control,” the bank says.

What is Quantitative Easing (QE)?

In extreme situations, the Reserve Bank of New Zealand (RBNZ) can enact a monetary policy tool called Quantitative Easing. QE is the process by which the RBNZ prints local currency and uses it to buy assets – usually government or corporate bonds – from banks and other financial institutions with the aim to increase the domestic money supply and spur economic activity. QE usually results in a weaker New Zealand Dollar (NZD). QE is a last resort when simply lowering interest rates is unlikely to achieve the objectives of the central bank. The RBNZ used it during the Covid-19 pandemic.

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