NZD/USD is trading around 0.5894 as American trading hours begin on Friday. Recent domestic data and rising inflation expectations are helping the pair recover after a two-day decline. New Zealand’s Business NZ PMI increased to 53.9 in April from 53.2. Businesses expect inflation to average 2.29% over the next two years, up from 2.06% in the last quarter.

The Reserve Bank’s Dilemma

The Reserve Bank of New Zealand (RBNZ) is expected to cut rates by 25 basis points. However, rising inflation expectations may cause them to be cautious. The US Dollar Index (DXY) remains steady at around 100.30 as tensions between the US and China ease, and the Federal Reserve considers future rate cuts. US economic data shows a slowdown, with disappointing results in Housing Starts, Building Permits, CPI, and PPI. Retail sales also fell short of expectations, increasing the chances of two Fed rate cuts this year. Consumer sentiment in the US dropped sharply in May, reflecting concerns among households. Attention now turns to upcoming economic data from New Zealand, starting with the Producer Price Index (PPI). The RBNZ aims for price stability and maximum sustainable employment, adjusting the Official Cash Rate (OCR) when needed. In extreme situations, the bank might use Quantitative Easing to boost the economy, which could weaken the NZD.

Current Market Sentiment

The NZD/USD is just below 0.5900 as demand for the kiwi stabilizes after earlier losses. This recovery is supported by a slight improvement in domestic metrics, with April’s Business NZ PMI rising to 53.9 from 53.2. While this change isn’t dramatic, it suggests that New Zealand’s business activity remains relatively strong despite global challenges. What stands out more is the rise in inflation expectations. Recent surveys show that people now expect inflation to be around 2.29% over the next two years, higher than the previous estimate of 2.06%. This puts the RBNZ in a tricky position—it still has the same target range, but analysts had anticipated a 25 basis point rate cut. Now, the bank may choose to wait longer before making any moves, as it analyzes data with inflation staying resilient. Easing too soon could lead to higher pricing risks. Over in the US, the dollar isn’t putting up much resistance. The Dollar Index is flat at 100.30, with little movement despite calming news around US-China relations. Instead, market participants are reassessing expectations for the Federal Reserve’s actions, especially as more economic reports suggest a cooling economy. US consumers spent less than anticipated last month, as indicated by the poor Retail Sales numbers, and the housing sector isn’t improving either. Both new starts and permits fell short of expectations. Additionally, inflation data came in softer than hoped, raising the possibility of two Fed rate cuts this year. Meanwhile, consumer confidence continues to drop, with a notable decline in the University of Michigan’s sentiment indicator in early May. The next potential driver for price movement may stem from New Zealand’s Producer Price Index. If production costs change significantly, it could either confirm or challenge the view on persistent inflation. A favorable outcome might support the New Zealand dollar, while a negative one could shift interest toward carry trades or other flows. We are closely monitoring how the central bank balances its two key goals: managing inflation and ensuring employment. Their decisions, whether adjusting the Official Cash Rate or employing unconventional measures like large-scale asset purchases, are likely to be careful and data-driven rather than following a set schedule. Upcoming domestic economic figures will be crucial in determining whether support for the currency can extend or needs to be reduced. For the time being, positions that react to volatility and rate expectation changes should be watched closely. Specific spot price levels may come into play again if there’s a shift in policy tone or surprises in inflation data, leading to tactical momentum changes. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now