The NZDUSD pair is going up because the US dollar has weakened. This is due to cautious expectations surrounding the Federal Open Market Committee (FOMC) meeting. A disappointing jobs report last Friday caused the dollar to drop, raising the chances that the Federal Reserve will cut interest rates by as much as 70 basis points by the end of the year. There’s an 8% possibility of a 50 basis point cut happening in September, depending on a soft Consumer Price Index (CPI) report. Currently, the US dollar is moving within a limited range, influenced by speculation about Fed policy. However, bearish views on the dollar might be overstated. If rate cuts lead to strong economic growth, future cuts could be lessened, helping the dollar. But for this trend to change, we need strong economic data.

The RBNZ’s Impact on the Pair

Recent actions by the Reserve Bank of New Zealand (RBNZ) have also boosted the NZDUSD pair, following an unexpected rate cut and predictions for more. The pair has approached a crucial trendline, where sellers could try to push it back to the 0.5850 support level. Meanwhile, buyers are looking for a breakout toward the 0.6050 resistance. On the charts, if there’s a pullback, buyers may step in around 0.5920, while sellers may target a drop to the 0.5850 support. Key economic reports coming this week include the US Producer Price Index (PPI), US CPI, and Jobless Claims, wrapping up with the University of Michigan Consumer Sentiment report. The US dollar’s weakness is the central focus, elevating the NZDUSD pair as we approach the next Federal Reserve meeting. The Non-Farm Payrolls report released last Friday indicated a meager addition of 110,000 jobs, much less than the expected 180,000, which has sparked increased speculation about interest rate cuts. This has reinforced the belief that the Fed will take action to support the economy. Market expectations now show that three rate cuts could happen by the end of 2025, based on fed funds futures trading. The chance of a rate cut at the September FOMC meeting is now above 85%, with a small but significant 8% chance for a larger 50 basis point cut. A weak inflation report tomorrow would likely confirm these dovish expectations and could push the dollar down even further.

Impact of Inflation Report

Tomorrow’s Consumer Price Index (CPI) report is crucial for the week. Economists expect the annual inflation rate to cool to 3.0%. A result at or below this would confirm the trend of easing inflation. For traders in derivatives, this could be a clear cue to bet on further declines in the dollar using short-dated options. We should also consider that pessimism around the dollar could be at an extreme. A similar scenario occurred in early 2024 when the market anticipated drastic cuts that never came because the economy remained robust. If the coming rate cuts effectively boost growth, the Fed might suggest fewer cuts in 2026, which could quickly change the dollar’s downward trend. On the New Zealand side, the Reserve Bank of New Zealand is also cautious after its August rate cut. Its outlook for two more cuts this year means that the NZDUSD rally is happening despite local economic conditions, rather than because of them. This makes the pair’s strength reliant on ongoing weakness in the US dollar. From a derivatives perspective, the NZDUSD is testing a key trendline that has historically acted as solid resistance. Options traders might consider buying puts or setting up bear call spreads near this level, with a break above the trendline as a clear exit signal. This strategy limits risk if you think the rally is becoming too stretched. For traders focused on short-term movements, the 0.5920 level serves as minor support. A pullback to this area might be a chance to buy short-term calls, hoping for a rebound. However, a strong break below this support would likely encourage sellers, making put options targeting the bigger 0.5850 support zone an appealing trade. Create your live VT Markets account and start trading now.

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