- NZD/USD draws support from a modest US weakness and a positive risk tone.
- Fed rate cut uncertainty should limit the USD losses and cap gains for the pair.
- China’s economic woes further warrant caution for aggressive bullish traders.
The NZD/USD pair attracts some dip-buying during the Asian session on Monday and looks to build on Friday's modest bounce from the vicinity of mid-0.6000s, or its lowest level since mid-May touched on Friday. Spot prices currently trade around the 0.6100 mark amid a modest US Dollar (USD) weakness, though lack bullish conviction amid the uncertainty over the Federal Reserve's (Fed) rate-cut path.
The US Personal Consumption Expenditures (PCE) Price Index released on Friday confirmed the disinflationary trend as shown by the Consumer Price Index (CPI) and Producer Price Index (PPI) for May. The data reaffirmed market bets that the Fed will start cutting interest rates at the September policy meeting, which keeps the USD bulls on the defensive. Apart from this, a positive tone around the US equity futures undermines the safe-haven buck and lends support to the NZD/USD pair.
That said, the Fed adopted a more hawkish stance at the end of the June policy meeting and forecasted only one interest rate cut in 2024. Furthermore, President Joe Biden's disastrous debate with his Republican opponent increased the odds of a Trump presidency. This, in turn, fueled worries that the imposition of aggressive tariffs by the Trump administration could fuel inflation and trigger higher rates, which remains supportive of elevated US Treasury bond yields and should limit the USD losses.
Adding to this, expectations that the Reserve Bank of New Zealand (RBNZ) will cut rates earlier than projected and China's economic woes might hold back bullish traders from placing fresh bets around the NZD/USD pair. In fact, official data released on Sunday showed that China's manufacturing activity fell for a second month in June while services activity slipped to a five-month low. This, in turn, warrants some caution before confirming that spot prices have formed a near-term bottom.
Moving ahead, traders now look forward to important US macro releases scheduled at the start of a new month, starting with the ISM Manufacturing PMI, for short-term opportunities later during the North American session. The focus, however, will remain glued to the closely-watched US monthly employment details, popularly known as the Nonfarm Payrolls (NFP) report on Friday. The latter will play a key role in influencing the near-term USD price dynamics and driving the NZD/USD pair.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
EUR/USD eases toward 1.0700 as USD finds feet ahead of ADP, Fed Minutes
EUR/USD is retreating toward 1.0700 in the early European session on Wednesday. The pair struggles, as the US Dollar finds its feet in the aftermath of the dovish Fed Chair Powell's comments. Cooling EU inflation keeps the Euro undermined. Eyes turn to US ADP data, Fed Minutes.
GBP/USD flatlines below 1.2700, looks to US data/Fed minutes
GBP/USD is lacking a firm directional bias below 1.2700 on Wednesday, reversing early gains. Traders appear reluctant and prefer to wait on the sidelines ahead of the FOMC minutes while the UK elections on Thursday also keep them on the edge. US ADP data eyed as well.
Gold eyes a range breakout, as Fed Minutes looms
Gold price is trading around a flatline near $2,330 early Wednesday, as traders consider the recent US jobs data and Federal Reserve Chairman Jerome Powell’s speech, bracing for yet another busy US calendar.
Bitcoin struggles around $64,000 level
Bitcoin faces resistance near the $64,000 daily level, leading to a 1.05% decline in trading on Wednesday. Ethereum and Ripple similarly encounter resistance, resulting in 1% and 0.5% declines, respectively.
UK election update: Labour slips in the polls, but remains trusted with the economy
With one day left before the election, the polls suggest that it will be an easy win for Labour, the question is the magnitude of their victory. The final polls before election day have seen support for Labour slip.