New Zealand Dollar slides as Middle East tensions give US Dollar the upper hand

• The New Zealand Dollar extends its decline for a third consecutive day, weighed down by cautious market sentiment.
• Uncertainty surrounding negotiations between the US and Iran supports safe-haven demand ahead of US inflation data.
• Markets remain divided over a US rate hike in September, while a rate increase in New Zealand remains widely expected.

NZD/USD extends its decline for a third consecutive day on Wednesday and trades around 0.5860 at the time of writing, down 0.28% on the day. The risk-sensitive New Zealand Dollar (NZD) remains under pressure as uncertainty surrounding negotiations between the United States (US) and Iran boosts demand for the US Dollar (USD).

Hopes of a diplomatic breakthrough in the Middle East remain fragile. Reports suggest that Washington and Tehran are moving closer to an agreement regarding the Strait of Hormuz, while parallel negotiations between Iran and Oman have reportedly made progress. However, US President Donald Trump's demands that Tehran pay reparations to victims of attacks linked to the Islamic Republic are keeping investors cautious.

A senior Iranian official also said that no discussions are currently taking place regarding an extension of the ceasefire between Iran and the United States, according to Reuters. From Tehran's perspective, there is no official start date for the ceasefire and therefore nothing to extend. This uncertainty is helping to maintain an unfavorable environment for risk-sensitive assets such as the Kiwi.

Market attention now turns to US inflation data due later on Wednesday. The Consumer Price Index (CPI) is expected to rise 0.1% on a monthly basis in July, while the core index is forecast to increase 0.2%. On an annual basis, however, headline and core inflation rates are expected to ease to 3.4% and 2.5%, respectively.

The release could play an important role in shaping expectations surrounding the Federal Reserve's (Fed) next policy decision. Following the decision to keep interest rates unchanged in July, investors remain divided over the possibility of monetary tightening as higher Oil prices add to inflationary risks. According to the CME FedWatch tool, markets price in around a 46% chance of a 25-basis-point rate hike in September, down from 54.4% a week earlier. A hotter-than-expected inflation reading could reinforce these expectations and provide further support to the US Dollar.

In New Zealand, the monetary policy outlook nevertheless provides some support to the Kiwi. Markets continue to anticipate a September rate hike from the Reserve Bank of New Zealand (RBNZ), as policymakers signal the need to continue withdrawing monetary stimulus to contain inflationary pressures.

Domestic political uncertainty adds another source of caution. New Zealand Prime Minister Christopher Luxon survives a second leadership challenge in four months on Wednesday. Less than three months before the general election, the episode highlights divisions within the National Party and adds another source of uncertainty for the New Zealand Dollar.

NZD/USD technical analysis

In the four-hour chart, NZD/USD trades at 0.5864, holding a neutral, range-bound tone as it consolidates slightly above the 100-period simple moving average (SMA) at 0.5842 and the 200-period SMA at 0.5791. The clustering of nearby supports under price suggests underlying demand, but the Relative Strength Index (RSI) around 42 hints at waning bullish momentum, keeping upside attempts in check for now.

On the topside, initial resistance is seen at the horizontal barrier at 0.5909, followed by a higher cap at 0.5930. On the downside, immediate support aligns near 0.5860, ahead of the 100-period SMA at 0.5842 and the horizontal level at 0.5825; deeper losses would expose the 200-period SMA at 0.5791 and a more distant floor around 0.5760.

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