NZD/USD Trends Upwards During Early Trading

The NZD/USD currency pair is seeing some upward movement, nearing 0.5615 in the early hours of Asian trading on Friday. This rise comes as the US Dollar is experiencing a decline against the New Zealand Dollar, largely due to falling Treasury bond yields. Traders are keeping an eye on ongoing inflation worries and are assessing what might happen with Federal Reserve interest rates. Later on Friday, the Michigan Consumer Sentiment Index for October will be released, which could add further insights.

Just last month, the Federal Reserve voted unanimously to increase the policy rate by a quarter of a percentage point. On Thursday, St. Louis Fed President Alberto Musalem noted that another rate hike will likely be necessary to steer inflation back to the 2% target, but he refrained from commenting on what the policymakers might decide in their upcoming meeting.

Fed Governor Christopher Waller indicated that while more rate hikes are probably required to reduce inflation to the intended target, there is some “flexibility” in how quickly these increases might occur. This leaves open the possibility of pausing at the forthcoming October meeting.

With expectations of further rate hikes by the Fed easing, bond yields have declined. For instance, the key 10-year Treasury yield fell over 4 basis points to 5.227%, after reaching its highest level since 2002 earlier this week. Meanwhile, the 30-year Treasury bond yield reduced by over 5 basis points to 5.602%, having recently been around a 24-year high.

According to the CME FedWatch tool, traders are currently estimating a 17.7% chance of a rate hike in October, with an 83% probability of an increase come December.

Analysts at Westpac anticipate that the Reserve Bank of New Zealand will keep the Official Cash Rate steady at 2.75% this month, predicting a rise of 25 basis points in December and two additional increases in early 2027.

USD Remains Strong Despite Oil and Yield Surges

Strategists from Scotiabank are observing that the USD maintains broad strength, entering Thursday’s North American session with gains against all G10 currencies. This is occurring even though underlying rate expectations are relatively modest. They comment on how geopolitical factors are influencing core market dynamics, particularly regarding oil prices and global bond yields. As an illustration, WTI crude saw a rise of $4 per barrel, moving back above $90, as the US 10-year yield inches toward multi-decade highs above 5.35%, levels we haven’t seen since 2002. Yet, Scotiabank mentions that pricing for Fed movements remains subdued, with only a 5 basis point tightening expected for October and a cumulative 26 basis point increase anticipated by December, indicating limited reaction to the latest fluctuations in oil prices.

Waller Hints at More Rate Hikes with a Flexible Approach, Supporting the Dollar

Fed’s Waller delivered a predominantly hawkish message, scoring 8 out of 10 on the FXS Speechtracker, which is above normal tightening levels. He emphasized that “more hikes [are] needed,” but indicated these need not happen at consecutive meetings. This suggests a preference for a higher terminal rate while allowing for some tactical flexibility. Waller pointed to AI-related investments and ongoing energy market shocks as factors that contribute to persistent inflation alongside a reasonably strong economy and a stable labor market. There is concern that inflation being above target for over five years could unsettle expectations, further supporting a tightening approach which typically benefits the Dollar.

The FXS Fed Sentiment Index increased by 0.42 points to 138.34, remaining in hawkish territory and consistent with the heightened FXS Speechtracker score. This uptick indicates that the market’s anticipated Fed stance has shifted more toward tightening, reinforcing a narrative that should be favorable for the Dollar in the medium term.

Technical Overview: NZD/USD Shows Weakness Below 100-Day SMA

Looking at the daily chart, the NZD/USD pair continues to reflect a bearish sentiment as it trades below the 20-period Bollinger middle band and the 100-day moving average. The upper Bollinger band is also acting as an effective cap, maintaining the downside bias, although the Relative Strength Index suggests that previous oversold conditions might be easing, rather than indicating a bullish shift.

Resistance on the upside is initially found at the Bollinger middle band, around 0.5665, followed by the upper band at 0.5778, and further along at the 100-day moving average at 0.5795—where a consistent breakout would be necessary to challenge the current bearish trend. On the downside, immediate support is situated at the lower Bollinger band, around 0.5555, and if prices close below that, we could see a move towards the mid-0.55s.