The Reserve Bank of New Zealand is not far from cutting interest rates, as long as domestic inflationary pressures allow it. This means that the consumer price inflation report for the second quarter of next year may sow the seeds for the Reserve Bank of New Zealand to start cutting interest rates in August, and the NZDUSD pair has fallen sharply in response.
The Reserve Bank of New Zealand turns dovish and expects to cut interest rates
The Reserve Bank of New Zealand went dovish in an early policy statement, choosing a headline that suggested inflation was close to the target range rather than keeping the official interest rate on hold in May.
In a dovish tone, the Reserve Bank of New Zealand noted that restrictive monetary policy had “significantly reduced consumer price inflation”, a marked change from its previous statement six weeks ago when it simply announced a “reduction” in inflation. The bank now expects headline inflation to return to its target range of between 1% and 3% in the second half of the year, which is less specific than its previous forecast in May, when it expected to achieve the target by the end of the calendar year. This is an additional step towards lowering interest rates
The RBNZ statement included dovish statements threaded throughout the statement, with the committee noting that “government spending will curb overall spending in the economy”, and that there are “signs that persistent inflation will moderate as capacity pressures and business pricing intentions decline”. These two additions are new and important in relation to the views expressed six weeks ago.
While the Reserve Bank of New Zealand continued to stress that monetary policy should remain restrictive
The Reserve Bank of New Zealand is moving to cut interest rates based on inflation expectations
With price stability being a core mission of the RBNZ, this essentially means that when it sees more evidence that price stability will be achieved, it will ease restrictions. Therefore, this indicates a reduction in interest rates. On this basis, it is possible that the Reserve Bank of New Zealand will cut interest rates next month if evidence of this is found in the June 4th quarter consumer price inflation report. Interest rate markets believe this is likely, raising the probability of a rate cut on August 14th from about one in three to about 60%.
New Zealand’s two-year interest rate swaps, which are affected by interest rate forecasts by the Reserve Bank of New Zealand, have seen a decline of around 13 basis points to 4.665% currently, a level far removed from the current cash rate of 5.5%.
NZDUSD pair affected by RBNZ shift and upcoming US inflation report
NZDUSD was sharply affected by the Reserve Bank of New Zealand’s shift to accommodative policy, falling as much as 0.8% before stalling against the 200-day moving average at 0.60728. This level is considered important and has encouraged buying in the past. Below, 0.6050 represents the next support level before a return to the 50 cents area is expected. To the upside, resistance levels are located at 0.6105, 0.6150 and 0.6218.
Although the momentum is trending downwards, the question arises as to whether it will continue in this trend. On Thursday, we will receive the US consumer price inflation report for June. If we see a weak fundamental reading of 0.2% or less
Are there any other technical indicators that indicate a possible trend for NZDUSD?
In addition to the support and resistance levels mentioned in the previous question, there could be some other technical indicators that indicate a possible trend for the NZDUSD pair. Among these indicators are:
Moving Average: The moving average can be used to determine the general trend of the pair. For example, if a longer time period moving average (such as 200 days) is moving up and intersects a shorter time period moving average (such as 50 days) from below, this could indicate a potential uptrend.
Relative Strength Index (RSI): The RSI is used to determine whether a pair is overbought or oversold. If the RSI value exceeds 70, the pair may be overbought and ready to reverse lower. If the RSI value exceeds 30, the pair may be oversold and ready to reverse higher.
Candlestick Patterns: Candlestick patterns can be monitored to find potential signals of a change in trend. For example, a reversal candle pattern such as a hammer or reversal candle may indicate a downtrend reversal and the start of a potential uptrend.
The Fed is likely to join the Reserve Bank of New Zealand in shifting towards a less restrictive stance. If the Fed signals an upcoming interest rate cut, it is doubtful that NZDUSD will trade lower. These statements reflect the caution and attention that the Reserve Bank of New Zealand attaches to economic developments and inflation, and indicate the need for careful monitoring and flexibility in its monetary policy in the future.
Focus on deflation shifts event risk While there are key risk events to contend with over the rest of the week, including the Institute for Supply Management’s non-manufacturing PMI later today and Friday’s non-farm payrolls data, the focus is now back on. On a downturn
