NZD/USD has been trending upward, nearing 0.5900, after the RBNZ’s Inflation Expectations for Q2 increased. These expectations rose to 2.29%, up from 2.06%, indicating expected annual CPI for the next two years. The New Zealand Dollar has gained from a decrease in global trade tensions, as the US and China reached a preliminary trade deal. This deal involves the US cutting tariffs on Chinese goods from 145% to 30%, and China reducing tariffs on US imports from 125% to 10%.

US Economy Outlook

The US Dollar is stable despite mixed economic data. The US Producer Price Index (PPI) increased by 2.4% in April, but this was a slowdown from March’s 2.7% and below the expected 2.5%. Core PPI saw an annual rise of 3.1%, down from 4%. On a monthly basis, headline PPI decreased by 0.5%, while core PPI dropped by 0.4%. Initial Jobless Claims held steady at 229,000 for the week ending May 10, matching revised numbers from the previous week. This indicates both economic resilience and a potential slowdown in growth.

Inflation and Trade Impacts

The recent increase in the New Zealand Dollar is due to changing inflation expectations and better external conditions. Local forecasts now expect consumer price inflation to reach 2.29% over the next two years, up from 2.06%. This significant change suggests that both businesses and consumers expect higher prices ahead. As expectations influence monetary policy, this shift supports buying of NZD, as the Reserve Bank may need to stay cautious. At the same time, reduced tariffs between the US and China have eased some global trade pressures. The US reduced tariffs from 145% to 30%, and China cut tariffs from 125% to 10%, improving the global risk environment. For export-driven economies like New Zealand, this reduction in trade friction supports currency strength. With less global uncertainty, investor sentiment improves, increasing demand for currencies linked to commodities. In the US, the Dollar remains steady amid mixed economic data. The PPI rose by 2.4% year over year in April, slightly down from March and just below the 2.5% forecast. This indicates that inflation pressures are easing. The core PPI, excluding food and energy, rose 3.1%, a full percentage point lower than before. Monthly figures show declines, with headline and core PPI dropping 0.5% and 0.4%, respectively. These slowdowns may influence interest rate expectations. Slower input cost inflation suggests less urgency for central banks to increase rates, which may reduce USD demand, especially if future data underperforms. Hiring data remains unchanged, with initial jobless claims steady at 229,000 for the second week in a row. This supports two competing views. Steady claims indicate a strong labor market, which could support spending trends. However, it also shows that job gains may be stalling, and any downturn could change sentiment quickly. For market positioning, there is potential for further adjustments in relative monetary policy expectations. The rise in long-term New Zealand inflation forecasts increases the likelihood that policy will remain tight, even as other developed markets consider easing. This divergence could lead to moderate outperformance of NZD in the near term, particularly against currencies undergoing policy changes. On technical analysis, movement near the 0.5900 level shows the market testing resistance. If next week’s data supports the inflation narrative or shows a weaker USD, we might see extended momentum, with short-term options pricing in greater upside risk. Conversely, a failure to break through may shift direction quickly, especially since positioning is partially long. Expect volatility during interim releases. A single negative surprise in jobs or inflation could lead to profit-taking. Thus, we prefer strategies that hedge against price fluctuations instead of committing heavily to breakout positions. Opportunities exist, but entry points must be precise, and exits clear. Create your live VT Markets account and start trading now.

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