Why is the New Zealand Dollar paring gains near 0.5700 after softer CPI inflation data?

• NZD/USD trims its advance near 0.5705 as Thursday’s Asian session gets under way.
• New Zealand’s third-quarter CPI inflation eases to a below-forecast 3.7% YoY.
• Market direction is expected to hinge on the Fed outlook ahead of next week’s policy meeting.

Gains in the New Zealand Dollar (NZD) against the US Dollar (USD) fade after Consumer Price Index (CPI) inflation undershot expectations, leaving NZD/USD steady around 0.5705 in early Asian trade on Thursday. Later on Thursday, attention turns to the weekly US Initial Jobless Claims release.

New Zealand’s annual CPI inflation eased from the previous reading of 4.1% to 3.7% in the third quarter (Q3), according to figures published by Statistics New Zealand on Thursday. The outcome was below the 3.8% forecast. Quarterly CPI growth also moderated, coming in at 0.7% in Q3 against 1.5% in Q2 and missing expectations of 0.8%.

The softer CPI release prompted a small initial decline in the Kiwi. Inflation nevertheless stayed above the upper limit of the Reserve Bank of New Zealand’s (RBNZ) target band, reinforcing expectations of an interest-rate increase next week.

According to Reuters, market pricing currently assigns nearly 98% odds to another RBNZ rate increase next week. It also implies a 100% probability of 50 basis points (bps) of tightening before the end of February.

Ahead of next week’s policy decision, traders in the US are assessing the likely course of Federal Reserve (Fed) interest rates. Fed Chair Kevin Warsh offered no indication last week of whether he believes further rate increases are necessary or when they might come.

Scotiabank’s chief FX strategist Shaun Osborne said: “There's not really an overarching theme for markets... and I think it's going to stay that way at least until next week into the FOMC,” adding: “We need to get a sense of what the Fed's thinking.”

Can an Undervalued Kiwi Gain as Hawkish RBNZ Signals Keep Rate Hikes in Play?

Expectations of tighter policy have gradually strengthened, ING analysts observe, with investors “pricing around 18-21bp for next week’s meeting since RBNZ’s Chief Economist Paul Conway delivered hawkish remarks last week.” According to the analysts, Conway “explicitly said this month’s decision is wide open, that he sees risk to the upside for 4Q CPI and that the NZD weakness is worrying,” with ING describing the message as one that “felt like an attempt to drive market pricing higher.” In this context, the bank’s view is that, “barring a major surprise lower in CPI tomorrow, we expect a 25bp hike next week.”

ING’s currency assessment is that “NZD remains cheap relative to its short-term fair value model,” while its analysts “expect it to keep recovering ground against its closest peer, AUD.” Their base case is that “we see NZD/USD trading above 0.570 into year-end,” with an undervalued currency and hawkish RBNZ messaging supporting additional Kiwi gains.

How Do Warsh’s Investment and AI Remarks Shape the Fed’s Open Policy Options?

A mildly constructive yet guarded assessment from Fed Chair Warsh registered 5.6/10 on the FXS Speechtracker, below its historical average of 6.1/10 and signalling a slightly softer tone. His acknowledgement of being “over-scarred from the global financial crisis” points to an enduring preference for protecting against downside risks and threats to financial stability. This caution persists despite his emphasis on structural growth and a surge in investment supported by “good policies.” Warsh also stressed that the October and December meetings should not be prejudged, noting that AI would affect demand before supply and that its near-term employment impact remained uncertain. Together, these remarks underline a data-dependent approach, limiting any immediate hawkish implication for the Dollar.

Despite the softer FXS Speechtracker reading, perceptions of the policy path changed little: the FXS Fed Sentiment Index recorded a 0.00-point move, holding at a firmly hawkish 127.51. Its position well above 100 suggests that markets continue to view the Fed as hawkish. However, Warsh’s emphasis on clearer output, employment and inflation data, alongside tail risks, points to a more nuanced assessment of risks rather than a decisive turn towards Dollar-bullish language.

Technical Analysis: Can NZD/USD Shake Off Its Negative Bias Below the 100-day SMA?

A tentative base appears to be forming within NZD/USD’s recent range on the daily chart, with the pair above the Bollinger Bands mid-line and comfortably clear of the lower band. However, the 100-day Simple Moving Average (SMA) remains overhead, limiting the broader recovery. Now near 56, the Relative Strength Index (14) points to firmer bullish momentum, though not yet a decisive shift, as the pair moves between band support and the trend barrier above.

The first significant hurdle is the 100-day SMA at 0.5775; a daily close beyond it would create scope for a more durable recovery. Initial support lies around 0.5705 in the upper Bollinger Band area, ahead of the mid-band near 0.5635. A decline through the lower band at approximately 0.5565 would leave the pair vulnerable to a deeper retreat within the existing range.

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