NZD/USD steadies as Fed dovish tone boosts rate cut bets, RBNZ eyed

NZD trims losses as the US Dollar pauses, with NZD/USD holding slightly softer near 0.5610.
Dovish Fed comments revive December rate-cut expectations, with 71% odds priced for a 25 bps cut.
RBNZ interest rate decision in focus, with markets fully pricing a 25 bps cut to 2.25% on Wednesday.

Vishal Chaturvedi FXStreet

The New Zealand Dollar (NZD) trims a portion of its earlier losses against the US Dollar (USD) on Monday, as the Greenback stalls amid rising expectations of a Federal Reserve (Fed) interest rate cut next month. At the time of writing, NZD/USD is trading around 0.5611, holding slightly lower on the day after briefly recovering from early weakness.

Markets had been scaling back December rate-cut bets in recent sessions following a cautious tone from several Fed officials. However, fresh dovish remarks from Fed Governor Christopher Waller and New York Fed President John Williams prompted traders to reassess the policy outlook after both signalled room for a near-term easing.

Waller told Fox Business on Monday that his primary concern is the softening labour market, noting that inflation is “not a big problem” given recent weakness in employment. Last week, Williams echoed a similar stance, saying the current policy setting remains “modestly restrictive” and that there is still scope for another adjustment to guide rates closer to neutral.

According to the CME FedWatch Tool, markets are now pricing a 71% probability of a 25-basis-point (bps) rate cut in December, sharply higher from levels as low as 30% last week.

Attention now turns to the Reserve Bank of New Zealand (RBNZ) interest rate decision on Wednesday. Markets are fully pricing a 25 bps cut, which would take the Official Cash Rate (OCR) to 2.25%. At its last meeting on October 8, the RBNZ delivered a larger-than-expected 50 bps reduction to 2.50% and stressed it “remains open to further reductions in the OCR.”

Since then, the economic backdrop has shown little improvement, keeping policymakers under pressure to support the weakening economy. New Zealand’s economy has contracted in three of the past five quarters, while business surveys continue to flag weak demand and softer hiring intentions. Although inflation is sitting close to 3%, near the top of the RBNZ’s 1-3% target band, and inflation expectations remain elevated, with investors expecting the upcoming decision to be the last cut of the cycle.

The latest New Zealand Institute of Economic Research (NZIER) Shadow Board recommendations also underline a divided stance heading into the meeting, with a majority recommending a 25 bps cut this week to cushion the slowdown, while a minority prefers holding rates steady to avoid reigniting price pressure or housing-market risks.

Economic Indicator

RBNZ Interest Rate Decision

The Reserve Bank of New Zealand (RBNZ) announces its interest rate decision after each of its seven scheduled annual policy meetings. If the RBNZ is hawkish and sees inflationary pressures rising, it raises the Official Cash Rate (OCR) to bring inflation down. This is positive for the New Zealand Dollar (NZD) since higher interest rates attract more capital inflows. Likewise, if it reaches the view that inflation is too low it lowers the OCR, which tends to weaken NZD.

Why it matters to traders?

The Reserve Bank of New Zealand (RBNZ) holds monetary policy meetings seven times a year, announcing their decision on interest rates and the economic assessments that influenced their decision. The central bank offers clues on the economic outlook and future policy path, which are of high relevance for the NZD valuation. Positive economic developments and upbeat outlook could lead the RBNZ to tighten the policy by hiking interest rates, which tends to be NZD bullish. The policy announcements are usually followed by interim Governor Christian Hawkesby's press conference.

Author

Vishal Chaturvedi

FXStreet

I am a macro-focused research analyst with over four years of experience covering forex and commodities market. I enjoy breaking down complex economic trends and turning them into clear, actionable insights that help traders stay ahead of the curve.

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