Kiwi Weakens as Strong US PCE Signals More Fed Hikes

Key Moments

NZD/USD Under Pressure as US Dollar Firms

The New Zealand Dollar is edging lower against the US Dollar in early Asian trade on Thursday, with NZD/USD hovering around 0.5950. The move comes as the US Dollar gains traction after the latest US inflation figures reinforced expectations that the Federal Reserve could deliver another interest rate increase. Market participants are now shifting their focus to the upcoming Jackson Hole Symposium on Friday for further policy signals.

US PCE Inflation Data Support Higher-for-Longer Fed Narrative

Data from the US Commerce Department on Wednesday showed that the Personal Consumption Expenditures (PCE) Price Index rose 3.7% in the 12 months through July, unchanged from June and slightly above the 3.6% consensus estimate. On a monthly basis, PCE increased 0.2% following a 0.1% decline in June, exceeding expectations for a 0.1% gain.

Core PCE inflation – the Federal Reserve’s preferred measure – remained steady at 3.3% year-on-year in July, matching market forecasts. This combination of steady core inflation and a marginally stronger headline print has helped sustain expectations that the Fed could still tighten policy before year-end.

This report kept the market’s expectation for a Fed rate hike by year-end alive, though Chairman Kevin Warsh’s upcoming speech at Jackson Hole “will be the ultimate test,” Westpac economist Ryan Wells said.

Rate-Hike Odds Edge Higher Ahead of Jackson Hole

Fed funds futures pricing reflected a slight increase in the perceived likelihood of another move by the US central bank following the PCE release. According to the CME FedWatch tool, markets are now assigning nearly a 38% probability to a 25 basis points Federal Reserve rate hike in September, compared with 36% before the data.

Traders are now awaiting the speech from Fed Chairman Kevin Warsh at the Jackson Hole symposium on Friday. Any remarks regarding the inflation outlook or the policy path could influence expectations for US interest rates and thereby drive further moves in USD pairs, including NZD/USD.

RBNZ September Decision Seen as Largely Priced In

Beyond the Federal Reserve, attention is also turning toward the Reserve Bank of New Zealand’s upcoming policy decision. Brown Brothers Harriman notes that focus is firmly on the next RBNZ meeting, with Elias Haddad emphasizing that “the next RBNZ policy decision, which also includes a fresh Monetary Policy Statement, is on September 2 and a 25bps back-to-back hike to 2.75% is virtually fully priced-in.”

This view highlights strong market conviction that the RBNZ will continue with its tightening cycle, even as some recent indicators have suggested softness in headline retail activity.

NZD/USD Technical Picture: Bullish Bias Above 100-Day SMA

From a technical perspective, NZD/USD maintains a constructive bullish stance on the daily chart, supported by price action holding above the 100-day simple moving average (SMA) and the middle line of the Bollinger Bands. The pair is moving toward the upper Bollinger Band, indicating that the recent advance is pushing into the upper portion of the volatility envelope, while the 14-period Relative Strength Index around 61.7 remains in positive territory and has not yet signaled overbought conditions.

On the upside, the first significant resistance level is located at the upper Bollinger Band around 0.5985, where profit-taking by buyers may begin to emerge. On the downside, initial support is seen at the middle Bollinger Band near 0.5905, followed by a more substantial cushion at the 100-day SMA around 0.5845. The lower Bollinger Band, currently near 0.5830, further reinforces this broader demand area on potential pullbacks.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

New Zealand Dollar: Key Drivers and Dynamics

The New Zealand Dollar (NZD), commonly referred to as the Kiwi, is a widely traded currency whose value is largely shaped by the performance of the New Zealand economy and the stance of the Reserve Bank of New Zealand. However, several specific factors can also have a notable impact on NZD movements.

The strength of the Chinese economy is an important influence, as China is New Zealand’s largest trading partner. Negative developments in China can imply reduced demand for New Zealand exports, weighing on the domestic economy and, in turn, the currency. Dairy prices are another critical driver, given that the dairy sector represents New Zealand’s main export industry. Elevated dairy prices tend to support export revenues, which can be positive for both economic activity and the NZD.

RBNZ Policy Framework and NZD Implications

The Reserve Bank of New Zealand targets inflation within a 1% to 3% range over the medium term, aiming to keep it close to the 2% midpoint. Interest rates are set with this objective in mind. When inflation runs too high, the RBNZ may raise interest rates to cool demand, which can also push bond yields higher and attract foreign capital, typically supporting the NZD. Conversely, lower interest rates generally act as a headwind for the currency.

The interest rate differential between New Zealand and the United States – both current and expected – can be especially important for the NZD/USD pair. Shifts in expectations around how RBNZ policy will evolve relative to the Federal Reserve often drive significant moves in the cross.

Macroeconomic Data and Risk Sentiment Effects

New Zealand’s macroeconomic data releases are critical for assessing the health of the economy and can materially influence the NZD. Strong readings on growth, employment, and confidence tend to be constructive for the currency. Robust activity can draw in foreign investment and may prompt the RBNZ to consider higher interest rates if inflation pressure is also evident. In contrast, weaker data typically exert downward pressure on the NZD.

Broader market risk sentiment is another key factor. The NZD usually performs well in risk-on environments, when investors are more optimistic about global growth prospects and demand for commodities and higher-yielding currencies increases. During periods of market stress or uncertainty, investors often reduce exposure to riskier assets, which can lead to NZD underperformance as capital flows into traditional safe havens.