NZD/USD Bounces Above Support After RBNZ 50 bps Rate Cut
NZD/USD broke below the 2024 low of 0.8550 after two months of relentless selling but jumped above today after the RBNZ 50 bps rate cut suggested a slower pace of rate cuts.
The NZD/USD pair broke out of its long-term trading range last week, with weak fundamentals offering little support for the Kiwi. Economic data from New Zealand has continued to underperform, contributing to a decline in the pair below the critical support level of 0.8550. This move opened the door for a potential retest of the 2022 low at 0.7470, however the price bounced higher and returned back to the range last night, after some mixed signals from the RBNZ.
NZD/USD Chart Daily – The 5-Cent Range Has Been Broken
RBNZ’s Dovish Stance and Economic Pressures
Economic indicators in New Zealand, including rising unemployment and declining inflation expectations, have bolstered the Reserve Bank of New Zealand’s (RBNZ) dovish outlook. These factors increase the likelihood of continued downward pressure on the Kiwi, as markets expect further monetary easing.
External Risks Amplify Downside
Adding to domestic challenges, potential tariffs on China proposed by Donald Trump could have adverse effects on the New Zealand economy, given its close trade ties with China. Against this backdrop, market expectations largely aligned around the RBNZ delivering a 50 basis point rate cut at its meeting today.
The combination of weak domestic data and external headwinds suggests that the NZD may remain under significant pressure in the longer term. However we saw a 60 pip bounce after the large cut, as minutes implied slower pace of rate cuts, which the RBNZ Governor Orr rejected as misunderstanding, but the NZD held he gains.
Reserve Bank of New Zealand Policy Meeting Summary
Policy Decision
- The Monetary Policy Committee (MPC) reduced the Official Cash Rate (OCR) by 50 basis points, bringing it to 4.25%.
Inflation
- Annual inflation is nearing the midpoint of the 1–3% target range.
- Inflation expectations and core inflation are aligning with this target, signaling progress toward price stability.
- Additional OCR reductions are expected in early 2025 if current economic trends persist.
Economic Conditions
- Economic activity remains below potential, reflecting subdued domestic conditions and reduced inflationary pressures.
- Factors such as declining import prices and stabilized wage and price behaviors are supporting lower inflation levels.
Future Outlook
- Economic growth is projected to rebound in 2025, aided by reduced interest rates.
- Employment growth will likely remain weak until mid-2025, with households continuing to face financial stress.
Global Environment
- Global growth is forecasted to remain sluggish, with geopolitical and policy uncertainties posing risks to economic and inflation stability.
Policy Stance
- The MPC emphasized that maintaining inflation near the midpoint of the target range is crucial. This approach preserves the flexibility needed to address potential future inflationary pressures.
Key Remarks from RBNZ Governor Orr
Rate Cut Projections
- Governor Orr clarified that it is a misunderstanding to interpret the Reserve Bank of New Zealand’s (RBNZ) projections as indicating a slower pace of rate cuts.
- The current projections align with the potential for a 50-basis-point rate cut in February, contingent on economic developments.
Volatility and Geopolitics
- Orr highlighted the expectation of increased price volatility due to ongoing geopolitical factors.
Discussion of Rate Adjustments
- While cutting by 75 basis points was not a primary focus, Orr later amended his statement to note that there was very little discussion about either a 75 or a 25-basis-point adjustment.
Flexibility in Policy
- The policy committee retains the option to convene at any time should conditions require immediate action.
Press Conference Access
- For further insights, the full press conference is available for viewing.
NZD/USD Live Chart
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