NZD/USD remains flat near 0.5800 amid market caution due to Fed decision

NZD/USD steadies as traders expect a 25 basis point rate cut by the US Fed on Wednesday.
CME FedWatch tool suggests almost fully pricing in a quarter basis point cut at the Fed's December meeting.
Traders await New Zealand’s Gross Domestic Product GDP data for Q3 due on Thursday.

Akhtar Faruqui FXStreet

NZD/USD holds ground as traders are bracing a potential interest rate cut by the US Federal Reserve (Fed) on Wednesday, with attention largely focused on the Fed's projections for 2025. The NZD/USD pair hovers around 0.5780 during Asian trading hours on Tuesday.

According to the CME FedWatch tool, markets are now almost fully pricing in a quarter basis point cut at the Fed's December meeting. Investors will closely monitor Fed Chair Jerome Powell's press conference and Summary of Economic Projections (dot-plot) after the meeting.

Additionally, the NZD/USD pair receives minor support as the US Dollar (USD) remains subdued for the third successive session amid market caution ahead of the Fed decision. The US Dollar Index (DXY), which measures the value of the US Dollar against its six major peers, trades around 106.70 at the time of writing.

On Monday, the preliminary S&P Global Composite Purchasing Managers Index (PMI) rose to 56.6 in December, from 54.9 prior. Meanwhile, the Services PMI improved to 58.5 from 56.1. The Manufacturing PMI declined to 48.3 in December, from the previous 49.7 reading.

In New Zealand, traders adopt caution as Gross Domestic Product (GDP) data for Q3 are scheduled to be released on Thursday. The economy is projected to shrink by 0.4% quarter-on-quarter, potentially falling back into recession.

China's Retail Sales, a crucial indicator for New Zealand's key trade partner, unexpectedly slowed in November, dampening sentiment in antipodean markets. Sales grew by 3.0% year-on-year, below the expected 4.6% and significantly down from October's 4.8% expansion.

On Monday, the domestic data showed that the Business NZ Performance of Services Index climbed to 49.5 in November, up from 46.2 in October, marking its highest level since February. Additionally, the Food Price Index increased by 1.3% year-on-year in November, slightly above the 1.2% rise recorded in October.

New Zealand Dollar FAQs

What key factors drive the New Zealand Dollar?

The New Zealand Dollar (NZD), also known as the Kiwi, is a well-known traded currency among investors. Its value is broadly determined by the health of the New Zealand economy and the country’s central bank policy. Still, there are some unique particularities that also can make NZD move. The performance of the Chinese economy tends to move the Kiwi because China is New Zealand’s biggest trading partner. Bad news for the Chinese economy likely means less New Zealand exports to the country, hitting the economy and thus its currency. Another factor moving NZD is dairy prices as the dairy industry is New Zealand’s main export. High dairy prices boost export income, contributing positively to the economy and thus to the NZD.

How do decisions of the RBNZ impact the New Zealand Dollar?

The Reserve Bank of New Zealand (RBNZ) aims to achieve and maintain an inflation rate between 1% and 3% over the medium term, with a focus to keep it near the 2% mid-point. To this end, the bank sets an appropriate level of interest rates. When inflation is too high, the RBNZ will increase interest rates to cool the economy, but the move will also make bond yields higher, increasing investors’ appeal to invest in the country and thus boosting NZD. On the contrary, lower interest rates tend to weaken NZD. The so-called rate differential, or how rates in New Zealand are or are expected to be compared to the ones set by the US Federal Reserve, can also play a key role in moving the NZD/USD pair.

How does economic data influence the value of the New Zealand Dollar?

Macroeconomic data releases in New Zealand are key to assess the state of the economy and can impact the New Zealand Dollar’s (NZD) valuation. A strong economy, based on high economic growth, low unemployment and high confidence is good for NZD. High economic growth attracts foreign investment and may encourage the Reserve Bank of New Zealand to increase interest rates, if this economic strength comes together with elevated inflation. Conversely, if economic data is weak, NZD is likely to depreciate.

How does broader risk sentiment impact the New Zealand Dollar?

The New Zealand Dollar (NZD) tends to strengthen during risk-on periods, or when investors perceive that broader market risks are low and are optimistic about growth. This tends to lead to a more favorable outlook for commodities and so-called ‘commodity currencies’ such as the Kiwi. Conversely, NZD tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.

Author

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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