NZD/USD hovers near 0.5800 amid Taiwan tensions, Fed policy uncertainty

• NZD/USD trades without a clear direction on Tuesday, hovering around 0.5800 at the time of writing.
• Military tensions around Taiwan and caution ahead of the FOMC Minutes limit risk appetite.
• Diverging expectations on the Fed’s rate path keep uncertainty surrounding the US Dollar elevated.

NZD/USD trades virtually unchanged on Tuesday around 0.5800 at the time of writing, after trimming part of its recent losses. However, recovery attempts remain fragile, as markets are dominated by a combination of monetary caution and renewed geopolitical risks in Asia, a backdrop that is not particularly supportive for cyclical currencies such as the New Zealand Dollar (NZD).

Investors remain focused on rising tensions between China and Taiwan. Beijing has launched large-scale military drills around the island, including live missile-firing exercises, in retaliation for an agreement with the United States (US) involving an $11 billion military aid package to Taipei. Taiwanese authorities confirmed the deployment of their missile systems, reviving fears of a regional escalation. This environment weighs on overall risk sentiment and curbs demand for growth- and trade-sensitive currencies like the New Zealand Dollar.

On the monetary front, market participants are awaiting the release of the Federal Open Market Committee (FOMC) Minutes from the Federal Reserve (Fed) later in the day, looking for clearer insight into internal discussions on the future policy outlook. At its latest meeting, the Federal Reserve delivered its third rate cut of the year, bringing the federal funds target range to 3.50%-3.75%, while emphasizing a data-dependent approach, particularly regarding inflation and labor market conditions.

Updated projections from the US central bank point to a policy rate near 3.4% by 2026, implying a more cautious easing path than what markets are currently pricing in. According to the CME FedWatch tool, investors continue to expect at least two additional rate cuts by the end of 2026. This gap between market expectations and official guidance continues to generate persistent uncertainty around the US Dollar (USD), limiting directional momentum in NZD/USD.

On the New Zealand side, analysts believe the rate-cutting cycle of the Reserve Bank of New Zealand (RBNZ) is likely on hold for now. The central bank lowered its policy rate by 25 basis points in November to 2.25%, while stressing that future moves will depend on economic and inflation developments. This relatively cautious stance provides modest support to the Kiwi, but not enough to trigger a more sustained rebound against a US Dollar that itself lacks clear catalysts.

In this context of thin trading volumes ahead of the year-end holidays, NZD/USD remains confined around the 0.5800 area, with investors adopting a wait-and-see approach amid geopolitical uncertainty and still-mixed signals from US monetary policy.