New Zealand Dollar struggles as political uncertainty overshadows US inflation

• The New Zealand Dollar loses ground while US inflation figures come in line with expectations.
• Tensions with Iran keep markets cautious as concerns persist around the Strait of Hormuz.
• New Zealand political uncertainty limits the upside potential of the Kiwi.

NZD/USD retreats to around 0.5865 on Wednesday at the time of writing, down 0.25% on the day. The New Zealand Dollar (NZD) remains under pressure against the US Dollar (USD), while inflation data from the United States (US) triggers only a limited reaction across the foreign exchange market.

In the United States, inflation, as measured by the Consumer Price Index (CPI), eased to 3.4% YoY in July from 3.5% in June, according to the Bureau of Labor Statistics (BLS). The reading comes in line with market expectations. On a monthly basis, prices rose by 0.1%, following a 0.4% decline in June.

Core inflation, which excludes volatile food and energy components, increases by 0.2% MoM and 2.5% YoY. These figures also match forecasts, limiting their impact on expectations surrounding the monetary policy outlook of the Federal Reserve (Fed).

The reaction of the Greenback therefore remains muted. The US Dollar Index (DXY), which measures the value of the US Dollar against a basket of six major currencies, edges slightly lower following the release. The absence of any major surprise in the inflation data provides no fresh catalyst capable of materially changing expectations for the Fed's next policy decisions.

Market sentiment remains fragile, however, on the geopolitical front. Reuters reports, citing a senior Iranian source, that no discussions are currently underway regarding an extension of the ceasefire between Washington and Tehran. According to the source, Iran considers that there is no official start date for the ceasefire and therefore nothing to extend.

The report dampens hopes for a swift de-escalation. Attacks on vessels attempting to cross the Straits of Hormuz and Bab el-Mandeb also fuel concerns, while US President Donald Trump calls on Tehran to pay reparations to victims of attacks linked to the Islamic Republic. This cautious environment limits appetite for risk-sensitive currencies such as the New Zealand Dollar.

In New Zealand, domestic political uncertainty provides an additional source of caution for the NZD. 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 Kiwi.

Fed relief builds as July CPI supports hold on rates

According to strategists at TD Securities, the July US CPI report offered a nuanced picture on inflation pressures. They highlight that "July's goods prices indicate tariff passthrough was firm, with some categories exposed to trade picking up. With that said, passthrough remains modest." Within the goods basket, "vehicle prices, communication, recreation, and other goods were among the key drivers of strength," but overall TD expects the data to "translate into slightly softer core PCE inflation at 0.18% m/m."

From a policy perspective, TD Securities argues that "today's report should continue to bring relief to the Fed regarding the need for tighter policy, at least in the near horizon." They point to "signs of normalization in services prices along with tariff pass-through that remains under control" as developments that "bode well for concerns around sticky core inflation," reinforcing their view that "the Fed will keep its policy stance unchanged this year."

Market reaction has been muted, with TD noting that "markets remain relatively unchanged in the wake of the July report, with the pricing for a hike in the September meeting still sitting just under 50%." In their assessment, "the print is supportive of a Fed hold," though they caution that they are "still waiting on further data before the September meeting since the Fed has lowered the bar for a rate hike." They also flag that "the PPI report carries some risks to our 0.18% m/m preliminary PCE forecast," underscoring the importance of upcoming data in shaping expectations.

NZD/USD technical analysis

In the one-hour chart, NZD/USD trades around 0.5864, maintaining a mildly bearish near-term bias as price holds beneath both the 100-period simple moving average (SMA) at 0.5879 and the 200-period SMA at 0.5878. The pair is hovering just above nearby horizontal support at 0.5860, while the Relative Strength Index (14) at 43 leans slightly to the downside, suggesting subdued bullish momentum and favoring further consolidation or modest weakness while capped by the overhead averages.

On the topside, initial resistance is located at the 200-period SMA near 0.5878, followed closely by the 100-period SMA at 0.5879, forming a tight intraday supply zone ahead of the next horizontal barrier at 0.5909 and the higher resistance level at 0.5930. On the downside, immediate support is seen at 0.5860; a break lower would expose the next floors at 0.5825 and 0.5760, where buyers are likely to re-emerge to defend the broader range.

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