Federal Reserve Cuts Interest Rates

In December, the Federal Reserve reduced interest rates by 25 basis points, bringing the target range down to 3.50%–3.75%. Throughout 2025, interest rates decreased by a total of 75 basis points as the job market softened and inflation stayed high. The New Zealand Dollar (NZD) may see some support due to expectations of a potential rate hike by the Reserve Bank of New Zealand (RBNZ). Economic growth showed a rebound in the third quarter, and interest rates are likely to remain steady for some time. The value of the NZD is shaped by New Zealand’s economic performance and the decisions of its central bank. Additionally, China’s economy plays a role because of its trading relationship with New Zealand. Changes in dairy prices, which are vital exports for New Zealand, also have an impact on the NZD. Data releases about New Zealand’s economy can influence the NZD’s value. Strong economic growth often attracts investment and might encourage the RBNZ to raise interest rates, which would boost the NZD.

The Potential Buying Opportunity in NZD/USD

As we approach the new year, the NZD/USD is struggling below 0.5850 due to a brief recovery in the US Dollar. We will keep a close eye on the FOMC Meeting Minutes released tomorrow, which should clarify the Federal Reserve’s outlook for 2026. This could lead to some market movement. Overall, the US Dollar appears weak as we enter 2026, which should benefit the NZD/USD pair. The Federal Reserve has already cut rates three times in 2025, a total of 75 basis points, to address a slowing economy, while inflation in November was still at 2.8%. The market is now predicting at least two more rate cuts from the Fed in the upcoming year. In contrast, the New Zealand Dollar finds itself on a stronger footing. The RBNZ is keeping rates stable and might even consider a hike due to an unexpected rebound in the economy during the third quarter. The growing interest rate gap between the US and New Zealand is a significant trend to watch. This optimistic view for the Kiwi is also backed by strong external factors. Dairy prices, a key export for New Zealand, have been rising steadily, with the recent Global Dairy Trade auction in mid-December reaching a yearly high. Additionally, recent manufacturing data from China, New Zealand’s top trading partner, revealed slight growth, boosting overall market sentiment. For traders, this indicates that any weakness in the NZD/USD over the next few weeks could present a buying opportunity. We believe strategies that benefit from a rising NZD/USD, such as buying call options, may prove to be effective, especially given the differing central bank policies. Options can also help manage risk from any unexpected news in tomorrow’s FOMC minutes. Create your live VT Markets account and start trading now.

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