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

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.