NZD/USD stays stable as markets evaluate New Zealand’s inflation data and increasing trade tensions between the EU and the US. A weaker US Dollar helps the New Zealand Dollar, even though inflation figures came in lower than expected. Inflation in New Zealand for the second quarter was 0.5%, missing the 0.6% forecast and down from 0.9% previously. The annual inflation rate reached 2.7%, below the expected 2.8%, but higher than last year’s 2.5%.

Reserve Bank Reaction

The Reserve Bank of New Zealand is closely monitoring signs of an economic slowdown and may consider rate cuts if disinflation continues. There are signs of weakening in areas such as business investment, household spending, and the job market, as noted by Acting RBNZ Governor Christian Hawkesby. The US Dollar’s decline is influenced by trade tensions with the EU, where the US is proposing higher tariffs on EU imports. This situation may strengthen the NZD, which has managed to avoid further losses due to these developments. Technical analysis shows that NZD/USD is stabilizing above support levels. A potential hanging man pattern suggests that the bullish momentum is weakening. If the price moves decisively above 0.6000, it could favor buyers, but a dip below 0.5951 might lead to more losses.

Potential Market Volatility

The current stability of the currency pair might just be a lull before a more volatile time. The lower-than-expected inflation data indicates underlying weaknesses in New Zealand’s economy, echoing the Reserve Bank’s cautious stance about a possible slowdown. Hawkesby’s comments are important; they indicate that the central bank is ready to cut rates if data continues to weaken. We’ve seen this happen before. For instance, during the 2019 easing cycle, the central bank reacted quickly to signs of slow growth. The latest ANZ Business Outlook survey reveals a drop in business confidence to -14.7 in June, suggesting that investment and hiring may continue to slow down. Conversely, the path of the US Dollar provides support for the Kiwi. Recent US inflation data showed a slight cooling, with the annual CPI rate dropping to 3.3% in May. This raises speculation about potential Federal Reserve rate cuts, preventing the US Dollar Index (DXY) from rising and offering indirect support for NZD/USD. The potential “hanging man” pattern is worth noting, as it suggests buying pressure may be fading. Given the mixed fundamental factors, we expect a breakout soon. The market is in a tug-of-war between a dovish domestic outlook and a potentially weakening international environment. In this uncertain situation, it’s wise to avoid taking a strong directional stance and instead prepare for greater price movements. Traders should look into using options to buy volatility, such as a long straddle, which would profit from significant price movements in either direction. This strategy is suitable if a breakout from the current range of 0.5951 to 0.6000 is expected but the direction remains unclear. For those worried about the downside risks posed by the central bank, buying put options with a strike price below the key support level provides a good hedge. This serves as an insurance policy against unexpected rate cuts or sudden negative shifts in global market sentiment, allowing traders to safeguard their capital while remaining positioned for potential US dollar weakness. Create your live VT Markets account and start trading now.

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