The NZD/USD pair is showing a slight downward trend for the second consecutive day, though it’s still holding above the swing low from yesterday. Currently, it’s hovering around the 0.5925-0.5920 mark, down about 0.15% for the day, likely due to a bit of dollar strength.
The U.S. dollar index (DXY), which measures the dollar against a variety of currencies, seems poised to build on its gains from yesterday. This is partly due to the uncertainty surrounding U.S.-Iran peace talks and hawkish signals from the U.S. Federal Reserve. U.S. President Trump has mentioned ongoing peace negotiations with Iran, expressing hopes of extending a ceasefire and reopening the Strait of Hormuz soon. However, Iran has indicated that it might halt negotiations in response to recent U.S. attacks and Israeli military actions in Lebanon.
This scenario adds to the geopolitical risk premium, functioning as support for the relatively safe U.S. dollar. Meanwhile, rising tensions in the Middle East have stoked worries about inflation and increased speculation that the U.S. central bank could raise interest rates by year-end. Traders are estimating, with over 50% likelihood, that the Fed will increase rates by at least 25 basis points (bps) at the December meeting, further bolstering the dollar and pressuring the NZD/USD pair.
On the other hand, the Reserve Bank of New Zealand (RBNZ) has suddenly adopted a more hawkish stance, which seems to limit the downside potential. The central bank’s outlook suggests a likely 25bp rate increase in its next meeting on July 8, with the Official Cash Rate (OCR) expected to reach about 2.85% by the end of the year. This indicates there could be up to three rate hikes, providing a degree of support for the New Zealand dollar (NZD) and making it less attractive for traders to take overly bearish positions on the NZD/USD pair. Caution is, perhaps, warranted before making any moves that could lead to further losses.
