New Zealand Dollar remains under pressure as Middle East tensions support US Dollar

The New Zealand Dollar (NZD) is experiencing ongoing pressure as tensions in the Middle East bolster the US Dollar, driven by safe-haven demand and expectations of US monetary tightening. Qatar reported progress in negotiations between Iran and Oman regarding the reopening of the Strait of Hormuz, with both parties offering positive feedback, though the talks remain at a critical stage.

Iran has set several conditions for reopening the strait, including war reparations from the US, lifting of sanctions, release of frozen Iranian assets, an end to military threats, and removal of the US naval blockade. Meanwhile, Iran has ruled out direct negotiations with US President Donald Trump before his term concludes in January 2029.

This geopolitical instability supports energy prices, with West Texas Intermediate (WTI) oil trading at $82.10, up more than 6% since the week's start. Higher oil prices contribute to elevated US Treasury yields, prompting investors to anticipate further Fed rate hikes. The CME FedWatch tool indicates a 50% probability of a 25-basis-point increase at the September meeting, up from 42% on Friday.

Cleveland Fed President Beth Hammack suggests more rate hikes may be necessary to reduce inflation toward the central bank’s target. Investors are now awaiting the release of the US Consumer Price Index (CPI) on Wednesday, which could shed light on the Fed’s interest rate trajectory. In New Zealand, rising energy costs complicate the monetary policy outlook, and markets remain cautious ahead of the Reserve Bank of New Zealand's (RBNZ) third-quarter inflation expectations data in September.

Domestic political uncertainty adds another factor to watch, with New Zealand Prime Minister Christopher Luxon convening an urgent caucus meeting on Wednesday amid speculation of a leadership challenge. The NZD has emerged as the strongest against the Swiss Franc today. The GBP/USD pair fell to near 1.3500 during early European trading hours on Wednesday, benefiting from Middle East tensions as a safe-haven currency compared to the British Pound.

Market observers will be keen on the upcoming US August jobs report on Friday. The EUR/USD pair remains under bearish pressure, trading near its lowest level in two weeks at 1.1600, as Middle East tensions fuel risk aversion and hawkish Fed repricing. Gold recovered from earlier losses, trading above $4,320, supported by the US Dollar's strength amid Fed expectations. The US Dollar's rise is expected to continue as Middle East tensions escalate further.