The NZD/USD pair rose by 0.3% to about 0.5975 during the Asian session, as the US Dollar weakened ahead of the Federal Reserve’s policy week. The US Dollar Index dropped 0.4% to around 97.00, its lowest in over four months. The US Dollar was weakest against the Japanese Yen, declining by 1.03%. This sharp fall was due to tariffs imposed on several European Union countries and the UK as a response to the US’s stance on Greenland.

US Interest Rates Forecast

US interest rates are expected to stay between 3.50% and 3.75%, according to the FedWatch tool, following a 75 basis points cut over the last three policy meetings. In contrast, there’s growing optimism for the New Zealand Dollar, especially with the CPI rising to 3.1%. The Federal Reserve adjusts interest rates to maintain price stability and support full employment in the US. It holds eight policy meetings each year to assess the economy and make decisions. The Fed also uses tools like Quantitative Easing (QE) and Quantitative Tightening (QT) to influence the US Dollar. Quantitative Easing increases credit flow in the financial system, often weakening the US Dollar. On the other hand, Quantitative Tightening stops bond purchases, which usually strengthens the US Dollar. Due to the distinct differences in monetary policy between the US and New Zealand, there’s a clear opportunity in the NZD/USD pair. The US Federal Reserve is expected to keep interest rates steady this week after cutting rates three times in late 2025. This is a stark contrast to the Reserve Bank of New Zealand (RBNZ), which faces rising inflation.

New Zealand Dollar Strength

The US Dollar’s weakness is likely to continue in the short term. The US Dollar Index (DXY) is testing a crucial support level around 97.00. Recent data, like last week’s retail sales, which fell 0.5% short of expectations, supports a dovish Fed stance. This economic softness makes a rate hike unlikely and puts pressure on the dollar. Meanwhile, the case for a stronger New Zealand Dollar is growing. Following the significant inflation rise of 3.1% in Q4 2025, overnight index swaps now show a 75% chance of a 25 basis point rate hike at the RBNZ’s next meeting on February 24th. This expectation of a rate increase is a key factor behind the Kiwi’s strength. Market positioning reflects this sentiment. The latest Commitment of Traders report revealed that net-long positions on the NZD held by non-commercial traders have surged to a 12-month high. This indicates large speculators are increasingly betting on further gains for the currency. For derivative traders, this suggests positioning for an upward move in NZD/USD. Buying call options with a strike price above the psychological 0.6000 level could be a smart way to take advantage of this predicted rally with defined risk. These options would benefit from both a rising spot price and an increase in implied volatility before the RBNZ meeting. A similar trend was observed in late 2021 when the RBNZ began raising rates months before the Fed, leading to a significant rally in the Kiwi. History shows that when such clear policy differences occur, the trend can gain substantial momentum. Thus, we see the current setup as a high-probability opportunity for continued NZD strength against the USD. However, the main risk is a surprisingly hawkish statement from the Fed this Wednesday, which could lead to a sudden reversal. Traders might consider hedging long positions by buying out-of-the-money put options on NZD/USD. A firm bounce for the DXY from the 97.00 level would be the first sign that the dollar’s downtrend is losing momentum. Create your live VT Markets account and start trading now.

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