RBNZ rate hike prospects leave New Zealand Dollar poised to rise

• With inflation risks persisting, traders anticipate a third successive RBNZ rate rise, taking rates to 3.0%.
• Strong market expectations that the Fed will leave rates unchanged in October weigh on the USD.
• Upcoming US PCE inflation data and preliminary Q3 GDP figures are in focus as traders seek direction.

Expectations of a Reserve Bank of New Zealand (RBNZ) rate rise later this week could support the New Zealand Dollar (NZD), potentially helping NZD/USD regain ground. For now, the pair is little changed at around 0.5700 in Monday’s Asian session, following modest gains on the previous trading day.

RBNZ expected to lift rates to 3% in October as tightening resumes

TD Securities has revised its expectations for the Reserve Bank of New Zealand’s October policy decision. Having previously indicated that “we had forecast the RBNZ to pause at its October meeting,” the bank now expects that “the Bank [will] hike the Official Cash Rate 25bps at this week's meeting to 3%.”

Last week’s figures showed third-quarter inflation slowing slightly more than expected, but analysts anticipate renewed price pressures in the fourth quarter. Such a rebound could take inflation above 4%, leaving it outside the RBNZ’s 1–3% target range for longer than earlier projections suggested.

Expectations for the Federal Reserve’s policy trajectory are also putting downward pressure on the US Dollar (USD), which could lend further support to NZD/USD. Markets expect the Fed to keep interest rates unchanged in October, with another increase potentially following in December. The CME FedWatch Tool puts the market-implied probability of a pause at the October 27–28 policy meeting at 90.6%, while the chance of a December rate rise stands at 79.7%.

This week’s key US economic releases are likely to draw traders’ attention as they assess the outlook for interest rates. The Personal Consumption Expenditures (PCE) inflation report and preliminary third-quarter GDP figures will be particular points of focus.

Fed communication takes centre stage as Warsh weighs inflation against growth

With an unchanged rate decision widely anticipated, Deutsche Bank economists expect attention to turn to the Fed’s communication. In their view, “the interest will therefore be in Chair Warsh’s press conference and how the Fed balances still-elevated inflation and solid growth against the recent tightening in financial conditions,” suggesting that the policy message could be as important as the decision for positioning in the US Dollar and US Treasuries.