New Zealand Dollar declines to near 0.5700 on hawkish Fed remarks ahead US PMI data

The New Zealand Dollar (NZD) experienced a decline to approximately 0.5710 during the early trading hours in Europe on Wednesday. This drop was fueled by hawkish remarks from officials of the US Federal Reserve (Fed) concerning persistent US inflation, which provided a boost to the US Dollar (USD) against the NZD. Market participants are eagerly awaiting the preliminary Purchasing Managers’ Index (PMI) reading from the US later in the week, which they believe could provide fresh impetus for currency movements.

Expectations of further tightening by the US central bank are high, as Fed policymakers have indicated the possibility of additional rate hikes if inflation fails to subside. Recent data reveals that there is now a 53.1% probability of a 25 basis point rate increase at the Fed's October meeting, up from 48.7% a week ago. Fed President Susan Collins, speaking on Tuesday, expressed support for the Fed's decision to raise interest rates, indicating a growing likelihood of additional rate hikes if inflation remains above the 2% target.

St. Louis Fed President Alberto Musalem also suggested that further rate increases might be necessary to reach the Fed's inflation goal. The upcoming meeting between US President Donald Trump and Chinese President Xi Jinping, aimed at stabilizing their strained relationship, is being closely watched by traders. Any positive developments stemming from the Trump-Xi Summit could potentially strengthen the China-proxy New Zealand Dollar, given China's significant role as a trading partner for New Zealand.

Strategists at Brown Brothers Harriman highlight the NZD's outperformance against major currencies, attributing this to the more hawkish stance adopted by Reserve Bank of New Zealand (RBNZ) Governor Anna Breman. Her comments have led to an increase in market expectations of a 25 basis point hike to 3.00% at the October 28 meeting, with odds rising from 57% to 73%.

Breman also emphasized the inflation risks stemming from energy markets, cautioning that persistent high oil prices could lead to slightly higher near-term inflation than initially projected. With New Zealand's Q3 Consumer Price Index (CPI) data set to be released on October 21, BBH notes that the RBNZ anticipates some easing, with headline CPI inflation expected to fall to 3.9% y/y from 4.1% in Q2.

Fed officials, particularly Fed President Susan Collins, have adopted a more hawkish tone, reflected in an FXS Speechtracker score of 8.1, compared to a historical average of 6.6. This increased hawkishness, coupled with concerns over persistent inflation and a stronger labor market, suggests that monetary policy will remain more restrictive for an extended period.

The heightened expectations of higher-for-longer rates have bolstered the Dollar, as markets anticipate a higher rate path. Technical analysis of the NZD/USD pair reveals a bearish outlook in the short term, with the currency trading below the 20-period Bollinger middle band and the 100-day moving average. The pair is testing the lower end of its recent range, and the Relative Strength Index (14) is approaching oversold territory, indicating that downward momentum may be nearing its end.

The NZD/USD faces resistance near the Bollinger middle band at 0.5815, followed by the 100-day MA at 0.5830. Conversely, the lower Bollinger band at 0.5660 could serve as the next significant support level, where a breakdown could trigger further declines.