New Zealand Dollar strengthens above 0.5600 amid softer US Dollar, easing yields

The New Zealand Dollar (NZD) strengthened above 0.5600 against the US Dollar (USD) on Friday, as the USD showed signs of weakness due to easing Treasury bond yields. Traders were monitoring the Federal Reserve's outlook for interest rates amid lingering concerns over inflation and the Fed's policy decisions. The Michigan Consumer Sentiment Index for October was scheduled to be released later that day.

In recent weeks, the Fed had voted to raise the policy rate by 0.25%, with St. Louis Fed President Alberto Musalem indicating that additional rate hikes may be necessary to bring inflation back to the 2% target. However, he did not specify the pace of these increases at their upcoming meeting. Fed Governor Christopher Waller suggested further rate hikes would likely be needed to lower inflation to the Fed's 2% target, but suggested there was some flexibility in the timing of these hikes, potentially including a pause at the October meeting.

Easing expectations for additional Fed rate hikes weighed on bond yields, with the 10-year Treasury yield falling over 4 basis points to 5.227% after peaking at its highest level since 2002 that week. The 30-year Treasury bond yield also decreased more than 5 basis points to 5.602% following recent high levels. CME FedWatch tool odds of a rate hike in October were at 17.7%, with an 83% probability of an increase in December.

Westpac analysts still anticipated the Reserve Bank of New Zealand (RBNZ) to keep the Official Cash Rate (OCR) unchanged at 2.75% for the month, with a 25 basis point hike in December and two additional increases early in 2027. Scotiabank strategists noted that the USD remained strong and was gaining against all G10 currencies, even as rate expectations remained moderate.

Despite recent moves in oil prices and global bond yields, Scotiabank observed that Fed pricing was muted, with only a 5 basis point increase expected for October and a cumulative 26 basis points by December. Fed Governor Waller conveyed a hawkish message, with an FXS Speechtracker score of 8/10, indicating a stronger-than-usual tightening bias.

The emphasis on more rate hikes but not necessarily at consecutive meetings suggested a preference for a higher terminal rate with tactical flexibility, highlighting AI-related investment, ongoing energy shocks, and a solid labor market as contributors to persistent inflation. The FXS Fed Sentiment Index increased to 138.34, firmly in a hawkish stance, signaling further tightening expectations and a positive medium-term outlook for the Dollar.

The NZD/USD pair maintained a bearish short-term outlook, trading below the 20-period Bollinger middle band (0.5665) and the 100-day moving average (0.5795). The next resistance levels were the Bollinger middle band (0.5665), upper band (0.5778), and the 100-day MA (0.5795). A sustained break above these levels could signal a shift in the prevailing bearish structure.

On the downside, immediate support was provided by the lower Bollinger band (0.5555), with a potential move below this level opening the door to a further decline toward the mid-0.55s.