New Zealand Dollar jumps to a three-week high after hawkish RBNZ rate hike

• NZD/USD extends gains for a second straight day after the RBNZ raises the OCR to 2.50%.
• The Kiwi draws support from a softer US Dollar and expectations of further RBNZ tightening.
• Geopolitical tensions and Fed rate hike expectations could cap NZD/USD's upside.

NZD/USD jumps 1% on Thursday, extending gains for a second consecutive day after the Reserve Bank of New Zealand (RBNZ) delivered a hawkish rate hike on Wednesday, while a softer US Dollar (USD) provides additional support. At the time of writing, the pair is trading around 0.5761, its highest level since June 19.

The RBNZ raised the Official Cash Rate (OCR) by 25 basis points to 2.50%. In its monetary policy statement, the central bank said, "With inflation still above target and economic activity expected to strengthen, some further reduction in monetary stimulus is likely to be required to return inflation to the 2% target mid-point."

Brown Brothers Harriman (BBH) noted, "The RBNZ has room to normalize the OCR to more neutral levels, which is NZD supportive. New Zealand inflation is still above target, and economic activity is expected to strengthen. The RBNZ's estimated neutral range is between 2.2% and 4.1%. The swaps curve implies nearly 100 basis points of tightening over the next twelve months, nearly twice as much as the RBNZ policy path projection published in May."

The RBNZ's hawkish stance is boosting the New Zealand Dollar (NZD) despite a deterioration in risk sentiment following renewed fighting between the United States and Iran. The US Dollar remains slightly weaker on Thursday, although escalating geopolitical tensions are expected to limit the Greenback's downside.

The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, trades around 100.85, down 0.20% on the day.

Traders also expect the Federal Reserve (Fed) to raise interest rates later this year, a factor that could provide additional support for the US Dollar and could limit gains in NZD/USD. New York Fed President John Williams said on Thursday, "Inflation is still far too high," adding that the Fed is "actively debating scenarios around inflation" and remains committed to bringing inflation back to its 2% target.