New Zealand Dollar extends losses as US Dollar strengthens on Fed bets

• NZD/USD falls 0.72% on Monday, weighed down by a stronger US Dollar.
• Markets see a high probability of a US interest rate hike on Wednesday.
• New Zealand's services sector recovery continues in August.

NZD/USD extends its decline on Monday, trading around 0.5770 at the time of writing, down 0.72% on the day. The New Zealand Dollar (NZD) comes under pressure mainly from a stronger US Dollar (USD), as investors increase bets on another interest rate hike by the Federal Reserve (Fed) at its monetary policy meeting on Wednesday.

The latest United States (US) inflation data have reinforced expectations of further monetary tightening. According to the CME FedWatch tool, markets are pricing in around an 88% chance of a 25-basis-point interest rate hike by the Fed this week, up from around 59% a week earlier. These expectations support the US Dollar and exert downward pressure on NZD/USD.

The Fed meeting therefore represents the main catalyst for the pair this week. Investors will also closely monitor Fed Chair Kevin Warsh's press conference for further clues about the future path of US interest rates. A message maintaining a restrictive policy stance could extend support for the US Dollar.

On the New Zealand side, the latest economic data nevertheless offer some signs of improvement. The BusinessNZ Performance of Services Index (PSI) rose to 51.2 in August, marking a third consecutive month of expansion and its highest level since September 2023. However, the improvement remains fragile. BusinessNZ Chief Executive Katherine Rich notes that three of the five sub-indices remain below the 50 threshold, suggesting that the recovery in the services sector remains uneven.

Meanwhile, the Reserve Bank of New Zealand (RBNZ) maintains a cautious stance after recently raising the Official Cash Rate (OCR) by 25 basis points to 2.75%. The central bank considers that the current level of interest rates remains accommodative and favors a gradual withdrawal of monetary stimulus.

This moderate approach limits expectations of an aggressive tightening cycle in New Zealand. The contrast with expectations of another Fed rate hike therefore favors the US Dollar against the Kiwi and keeps NZD/USD under pressure ahead of Wednesday's decision.

New Zealand growth slows as RBNZ rate path undercuts swaps, weighing on Kiwi

Analysts at Brown Brothers Harriman note that New Zealand’s Q2 activity data are likely to underscore a sharp loss of momentum. They expect “New Zealand Q2 real GDP (Wednesday). Production-based real GDP is expected at 0.1% q/q (RBNZ projection: 0%) vs. 0.8% in Q1,” highlighting a marked deceleration from the prior quarter. BBH attributes the weaker outturn to a squeeze on household purchasing power, stressing that “lower real incomes due to higher prices for fuel, elevated uncertainty, and declining house prices reduced domestic spending and growth over Q2.”

However, the bank also points to signs that the slowdown may prove temporary, noting that “encouragingly, leading indicators point to a recovery over Q3.” On the policy side, BBH underscores the RBNZ’s assessment that “spare capacity remains in the economy, particularly in the labour market,” a view that sits uneasily alongside market pricing. They highlight that “the swaps curve implies a policy rate at 4.25% in the next two years,” whereas “the RBNZ projects the policy rate (currently, 2.75%) to peak at around 3.25% in 2028, which would still leave it below the top end of its nominal neutral range estimate between 2.3% and 4.1%.” According to BBH, this gap “leaves ample room for a dovish repricing which is a drag on NZD.”

NZD/USD technical analysis

In the one-hour chart, NZD/USD trades at 0.5771, extending its decline beneath the 100-period simple moving average (SMA) at 0.5828 and the 200-period SMA at 0.5848, which keeps the near-term bias bearish. The pair is slipping toward a previously drawn horizontal floor at 0.5760, while the Relative Strength Index (14) has dropped to about 24, showing oversold conditions that hint at stretched downside but not yet a clear reversal.

On the topside, initial resistance is located at 0.5793, followed by a nearby barrier at 0.5802, ahead of the 100-period SMA at 0.5828 and the 200-period SMA at 0.5848, which together define a broader supply zone limiting recovery attempts. On the downside, the immediate level to watch is the horizontal support at 0.5760; a sustained break below this base would open the way for continued weakness, while holding above it could trigger a corrective bounce within the prevailing bearish structure.

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