New Zealand Dollar extends losses as US Dollar strengthens on Fed bets

New Zealand's currency, the NZD, has continued to decline against the US Dollar (USD) on Monday, slipping to around 0.5770. This downward trend is primarily attributed to the strength of the USD, as investors anticipate further interest rate hikes by the Federal Reserve (Fed) in their upcoming monetary policy meeting. The latest US inflation data has bolstered expectations of additional tightening measures from the Fed.

With an 88% probability of a 25-basis-point hike this week, up from 59% a week earlier, the US Dollar gains strength and puts downward pressure on the NZD/USD pair. The Federal Reserve's meeting is the primary driver for this pair's movements this week, with investors keeping a close eye on Fed Chair Kevin Warsh's press conference for more insights on the future direction of US interest rates.

Any indication of maintaining a restrictive policy stance could further bolster the US Dollar. On the New Zealand side, recent economic data present some positive signs, with the BusinessNZ Performance of Services Index (PSI) rising to 51.2 in August, marking a third consecutive month of expansion and the highest level since September 2023.

However, this growth remains uneven, as only three out of five sub-indices are above the 50 threshold. The Reserve Bank of New Zealand (RBNZ) has taken a cautious approach after recently raising the Official Cash Rate (OCR) by 25 basis points to 2.75%, signaling that the current interest rates are still accommodative and favoring a gradual withdrawal of monetary stimulus.

This moderate stance dampens expectations of an aggressive tightening cycle in New Zealand. The contrast between the anticipated Fed rate hike and the RBNZ's cautious approach keeps the NZD/USD pair under pressure ahead of Wednesday's Fed decision. Analysts note that New Zealand's second-quarter activity data are likely to highlight a significant slowdown, with production-based real GDP expected to grow by only 0.1% quarter-over-quarter, down from 0.8% in Q1.

The RBNZ's assessment of spare capacity in the economy, particularly in the labor market, is at odds with market pricing, implying a potential dovish shift in policy expectations that could weigh on the NZD. Currently, NZD/USD is trading at 0.5771, below both the 100-period and 200-period simple moving averages, indicating a bearish near-term bias.

The pair is nearing a previously identified horizontal support level at 0.5760, with the Relative Strength Index (14) at 24, indicating oversold conditions but not yet signaling a clear reversal. On the upside, initial resistance is found at 0.5793 and 0.5802, followed by the 100-period and 200-period SMAs at 0.5828 and 0.5848, respectively, forming a broader supply zone for recovery attempts.

Conversely, the immediate support level to watch is the horizontal base at 0.5760; breaking below this level could lead to further downside, while holding above it may trigger a corrective bounce within the prevailing bearish structure.