The NZD/USD pair is trading near 0.5660 during Monday’s Asian session, marking its second consecutive day of gains. The pair benefits from a subdued US Dollar (USD) following softer inflation data but faces headwinds from weak domestic economic indicators and anticipated monetary policy easing by the Reserve Bank of New Zealand (RBNZ).
Fed’s Policy Easing Expectations Boost NZD/USD
The US inflation report, as reflected in the Personal Consumption Expenditures (PCE) Price Index, indicates moderation in price pressures. Core PCE inflation, the Federal Reserve’s (Fed) preferred measure, rose by 2.8% year-over-year in November, slightly below the 2.9% estimate. Monthly core inflation increased by just 0.1%, undershooting expectations of 0.2%.
These figures have fueled speculation that the Fed may adopt a slower pace of rate cuts in 2025. According to the CME FedWatch tool, markets now see a 90% probability that the Fed will keep rates unchanged in January, maintaining the current range of 4.25%–4.50%. This narrative has dampened USD strength, supporting the NZD/USD pair.
Weak New Zealand Economy Caps Upside Potential
Despite the USD’s softness, the New Zealand Dollar (NZD) faces limitations due to weak domestic economic performance. New Zealand’s GDP contracted by 1.0% in Q3, extending the country’s recession—the deepest since the COVID-19 pandemic’s initial impact. On an annual basis, GDP shrank by 1.5%, missing expectations of a 0.4% contraction.
These data points have intensified expectations of aggressive monetary easing by the RBNZ. Markets are fully pricing in a 50 basis point rate cut in February. Such a move would further weaken the NZD by reducing the interest rate differential against other currencies, particularly the USD.
Global Factors and NZD Sentiment
China’s economic performance remains a key external factor influencing the NZD, as New Zealand’s largest trading partner. Any signs of economic slowdown in China could reduce demand for New Zealand exports, particularly dairy products, and weigh on the Kiwi.
Additionally, broader risk sentiment affects the NZD/USD pair. While the Kiwi tends to strengthen during periods of risk-on market sentiment, ongoing global uncertainties, including geopolitical tensions, could limit the appeal of risk-sensitive assets like the NZD.
Outlook for NZD/USD
Although the Fed’s softer inflation stance provides temporary support for NZD/USD, the pair’s upside remains constrained by New Zealand’s weak economic outlook and the RBNZ’s dovish monetary policy expectations. Traders may need to see significant improvements in domestic data or global risk sentiment before betting on sustained gains in the pair.
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