- NZD/USD may lose ground due to risk-off sentiment amid rising tensions in the Middle East.
- The US dollar gains ground as the probability of an aggressive Fed rate cut in November decreases.
- The New Zealand Dollar could struggle as the RBNZ is expected to make a 50 basis point cut next week.
NZD/USD trims daily gains but maintains some gains, trading around 0.6290 during early European hours on Wednesday. The risk-sensitive NZD’s upside could be limited due to rising risk-off sentiment amid escalating geopolitical tensions in the Middle East.
Iran launched more than 200 ballistic missiles at Israel, prompting Prime Minister Benjamin Netanyahu to vow retaliation against Tehran for Tuesday’s attack. In response, Iran warned that any counterattack would lead to “vast destruction,” raising concerns of a broader conflict, according to Bloomberg.
Earlier this week, Federal Reserve (Fed) Chairman Jerome Powell said the central bank will reduce its interest rate gradually over time. The US dollar receives support from the decreasing probability of an aggressive rate cut by the Fed in November.
The CME’s FedWatch tool indicates that markets are assigning a 62.7% probability to a 25 basis point rate cut by the Federal Reserve in November, while the probability of a 50 basis point cut is 37. .3%, down from 57.4% a week ago.
The Reserve Bank of New Zealand’s (RBNZ) policy meeting is scheduled for next week, and markets have already priced in a strong likelihood of a 50 basis point interest rate cut. HSBC analysts now expect the RBNZ to cut its cash rate by 50 basis points in both October and November, revising its previous forecast of 25 basis point cuts for each month.
The Bank of New Zealand (BNZ) also predicts a 50 basis point cut by the RBNZ next week. “In our opinion, the disinflationary data we have received will be a key factor, leading the RBNZ to accelerate its easing process,” they stated.
The RBNZ FAQs
The Reserve Bank of New Zealand (RBNZ) is the country’s central bank. Its economic objectives are to achieve and maintain price stability – achieved when inflation, measured by the Consumer Price Index (CPI), falls within the range between 1% and 3% – and to support maximum sustainable employment.
The Monetary Policy Committee (MPC) of the Reserve Bank of New Zealand (RBNZ) decides the appropriate level of the Official Cash Rate (OCR) in accordance with its objectives. When inflation is above target, the bank will try to control it by raising its key OCR, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the New Zealand Dollar (NZD) as they generate higher returns, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken the NZD.
Employment is important to the Reserve Bank of New Zealand (RBNZ) because a tight labor market can fuel inflation. The RBNZ’s goal of “maximum sustainable employment” is defined as the highest use of labor resources that can be sustained over time without creating an acceleration of inflation. “When employment is at its maximum sustainable level, there will be low and stable inflation. However, if employment is above the maximum sustainable level for too long, it will eventually cause prices to rise increasingly rapidly, requiring the MPC to raise interest rates to keep inflation under control,” the bank says. central.
In extreme situations, the Reserve Bank of New Zealand (RBNZ) may implement a monetary policy tool called Quantitative Easing. QE is the process by which the RBNZ prints local currency and uses it to purchase assets (usually government or corporate bonds) from banks and other financial institutions with the aim of increasing the domestic money supply and stimulating economic activity. QE generally results in a weaker New Zealand Dollar (NZD). QE is a last resort when simply lowering interest rates is unlikely to achieve the central bank’s objectives. The RBNZ used it during the Covid-19 pandemic.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
