NZD/USD sticks to RBNZ-inspired losses, defends 0.6000 mark ahead of US CPI report

NZD/USD retreats sharply from a multi-week top after the RBNZ’s surprise 25 bps rate cut.
Dovish Fed expectations and a positive risk tone undermine the USD, lending some support.
Traders now look forward to the US consumer inflation figures before placing directional bets.

Haresh Menghani FXStreet

The NZD/USD pair witnessed a dramatic intraday turnaround from a four-week high touched earlier this Wednesday after the Reserve Bank of New Zealand's (RBNZ) surprise 25 basis points (bps) rate cut. Spot prices, however, manage to defend the 0.6000 psychological mark through the early part of the European session as traders keenly await the release of the US consumer inflation figures before placing fresh directional bets.

The New Zealand Dollar (NZD) weakened across the board after the RBNZ board members decided to cut the Official Cash Rate (OCR) for the first time since March 2020 and indicated more cuts over the coming months. The central bank cited the recent progress towards meeting the annual inflation target and weak domestic economic growth behind the surprise move, which defied expectations. The dovish tilt turns out to be a key factor behind the NZD/USD pair's steep intraday downfall of over 80 pips.

The US Dollar (USD), on the other hand, languishes near its lowest level in more than a week amid expectations for deeper interest rate cuts by the Federal Reserve (Fed). The bets were lifted by the softer-than-expected US Producer Price Index (PPI) on Tuesday, which provided more evidence of cooling inflation. Apart from this, a generally positive tone around the equity markets undermines demand for the safe-haven Greenback and helps limit the downside for the perceived risk-sensitive Kiwi.

Traders also seem reluctant and prefer to wait for the release of the US consumer inflation figures for cues about the Fed's rate-cut path before placing fresh directional bets. Hence, it will be prudent to wait for strong follow-through selling before confirming that the NZD/USD pair has topped out in the near term and that the recent recovery from the mid-0.5800s, or the YTD low touched last week has run its course.

Economic Indicator

RBNZ Interest Rate Decision

The Reserve Bank of New Zealand (RBNZ) announces its interest rate decision after 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 Governor Adrian Orr’s press conference.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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