New Zealand Dollar gains on hawkish RBNZ policy outlook

The New Zealand Dollar (NZD) strengthened on Friday after four days of losses, trading near 0.5870 in early European hours. This gain is attributed to traders pricing in a possible Reserve Bank of New Zealand (RBNZ) rate hike next month, as the RBNZ has repeatedly emphasized the need to reduce its policy support. However, recent soft economic data has raised concerns about the RBNZ's ability to maintain its tightening monetary policy.

For instance, the Business NZ Performance of Manufacturing Index declined to 54.3 in July from a revised 60.1 in June, indicating a slowdown in the economy. Despite this, the RBNZ survey shows inflation expectations remain close to their 2% target midpoint, reinforcing the credibility of the central bank in managing the Kiwi and the appropriate stance of RBNZ policy.

The US Dollar (USD) declined due to the focus shifting toward the upcoming US July Retail Sales data and a weaker-than-expected US inflation report, which has negatively impacted investor sentiment. The US inflation data showed flat wholesale costs for goods and services in July, below the expected 0.2% growth and a revised 0.1% decline in June.

Core Producer Price Index (PPI) rose 0.2% and 4.2% on an annual basis in July. These cooling inflation metrics have shifted expectations regarding Federal Reserve monetary policy, with markets now pricing in a 34.8% probability of a US rate hike at the September meeting, down from 40% following the PPI data release. NZD/USD is currently trading at 0.5870, above its 50-day EMA at 0.5823 and 9-day EMA at 0.5865, indicating a constructive near-term bias while consolidating just above the shorter average.

The Relative Strength Index (14) is at 56.6, remaining in positive territory without being overbought, suggesting bullish momentum without being stretched. Support levels are provided by the 9-day EMA at 0.5865 and the 50-day EMA at 0.5823, while the next structural floors could be at 0.5580 and 0.5486.