NZD/USD has dropped to about 0.5940 as the New Zealand Dollar and Australian Dollar struggle against major currencies. This decline comes as the Reserve Bank of New Zealand is expected to lower interest rates in its August meeting. Recent economic data shows that New Zealand’s Consumer Price Index for Q2 increased by 0.5%, which is lower than the forecast of 0.6%. This indicates less pressure on prices. There’s now an 80% chance the RBNZ will cut rates from the current 3.25% on August 20.

Currency Weakness

The New Zealand Dollar has weakened against key currencies, dropping by 0.49% against the Swiss Franc. Meanwhile, the US Dollar has regained strength after recent losses, with focus on upcoming trade talks. Technical analysis indicates that the NZD/USD is above the 200-day Exponential Moving Average at 0.5910. Despite this, the overall trend is downward, with possible lows at 0.5883, 0.5846, and 0.5800. If the pair rebounds above 0.6000, it may target levels of 0.6040 and 0.6100. Traders are also watching the 14-day Relative Strength Index, which is around 40. If it falls below this level, it might indicate further declines. The main reason for the kiwi dollar’s weakness is the central bank’s dovish approach. With New Zealand’s annual inflation rate at 4.0% as of Q1 2024, the ongoing reduction from previous highs strengthens the expectation for a rate cut, making the currency less appealing compared to others.

Monetary Policy Divergence

On the other hand, the US Dollar is gaining support from differing monetary policies. The Federal Reserve’s latest outlook suggests only one rate cut in 2024, a cautious stance that contrasts sharply with the expected easing from New Zealand. This gap in policies likely favors the US Dollar in the near future. For derivative traders, this trend suggests considering put options with strike prices near the support levels of 0.5883 and 0.5846. A drop in the momentum indicator below its current level would provide strong confirmation to enter or expand bearish positions. This approach allows for controlled risk while taking advantage of anticipated declines. We have seen similar patterns before, especially during the 2014-2015 period. Historically, when the Reserve Bank of New Zealand begins an easing cycle while the US remains hawkish, the NZD/USD pair tends to decline consistently. This historical context suggests a prolonged downward trend may be ahead. Despite the bearish outlook, we need to be cautious of a short-term bounce above the 0.6000 level. Traders could consider call options with strike prices around 0.6040 as a hedge against short positions or for potential speculative gains. A strong hold above the key moving average would be the first indication that our main thesis needs to be reassessed. Create your live VT Markets account and start trading now.

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