NZD/USD Resilient after the Fed’s Aggressive Tone
NZD/USD Analysis
The pair comes from a volatile week, as the six-month highs from the soft US CPI report gave way to a slump, sparked by the Fed's hawkish message, which points to a higher-for-longer environment.
The US central bank downshifted to an 0.5% increase on Wednesday, after a series of historically large 75 basis points hikes. Despite this deceleration, it expects more tightening ahead, with Chair Powell stressing that "we're not in a sufficiently restrictive policy stance yet". [1]
More to it, officials raised their expectations around the terminal rate, to a median of 5.1%. This a sizeable bump from the previous 4.6% projection and implies another 75 basis points worth of hikes.
NZD/USD dropped as a result and posted a losing week, after a streak of eight profitable ones, which creates risk for further decline to the 0.6250-10 confluence of supports. Daily closes below it would shift bias to the downside and expose it to 0.6059, but a catalyst would be required for that.
The Fed may have been very aggressive, but markets don't seem convinced that it will raise rates as high as it suggests. CME's FedWatch Tool assigns the highest probability to a terminal rate of 5.00% and also point to rate cuts in the back-half of 2023. [2]
Although most central banks have by now entered a phase of slowing their tightening pace, the Reserve Bank of New Zealand has refrained from such action, nor has shown any intention to do so. In fact, it accelerated last month, with a historic 0.75% increase that brought the official cash rate (OCR) to 4.25. [3]
Furthermore the RBNZ stressed the need for rates to reach a "higher level, and sooner than previously indicated". In line with this rhetoric, the bank upgraded its OCR forecast to 5.5% in 2023, expecting it to remain elevated for a long period of time.
Headline CPI inflation may have eased in the third quarter, but policy makes don't believe that was the peak, while last week's impressive GDP figures can only embolden their hawkish stance.
These are factors that can sustain upside bias of NZD/USD, which has the ability to push for fresh highs towards 0.6569, although further advance towards and beyond 0.6675 has a higher degree of difficulty.
Nikos Tzabouras
Senior Market Specialist
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.
References
| Retrieved 19 Dec 2022 https://www.federalreserve.gov/monetarypolicy/fomcpresconf20221214.htm | |
| Retrieved 19 Dec 2022 https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html | |
| Retrieved 25 May 2023 https://www.rbnz.govt.nz/hub/news/2022/11/higher-interest-rates-necessary |
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