NZD/USD trades in the red below one-month top/0.6000 as USD firms ahead of Fed decision
- NZD/USD drifts lower and snaps a two-day winning streak to an over one-month high.
- A modest USD bounce and the cautious market mood exert some pressure on the pair.
- Investors now look to the FOMC policy decision ahead of the NZ Q2 GDP on Thursday.
The NZD/USD pair struggles to capitalize on its weekly gains registered over the past two days, to an over one-month high, and attracts some sellers in the vicinity of the 0.6000 psychological mark during the Asian session on Wednesday. Spot prices slide to the 0.5975 region in the last hour amid modest US Dollar (USD) uptick, though the downside seems limited as traders await the pivotal FOMC decision.
The US Federal Reserve (Fed) is widely expected to lower borrowing costs by at least 25 basis points (bps) at the end of a two-day meeting later today. Hence, the focus will be on updated economic projections and Fed Chair Jerome Powell's comments at the post-meeting press conference. Investors will look for cues about the central bank's rate-cut path, which, in turn, will play a key role in influencing the near-term USD price dynamics and provide a fresh directional impetus to the NZD/USD pair.
Heading into the key central bank event risk, some repositioning trade assists the buck to recover slightly from its lowest level since early July. Apart from this, the cautious market mood benefits the Greenback's relative safe-haven status and exerts some downward pressure on the risk-sensitive Kiwi. Any meaningful USD appreciation, however, seems elusive amid rising bets for a more aggressive policy easing by the Fed. This, in turn, could offer support to the NZD/USD pair and help limit deeper losses.
The market focus will then shift to New Zealand’s second-quarter GDP print on Thursday morning, which is expected to show that the economy contracted by 0.3% following the solid 0.8% growth reported during the March quarter. The data could drive market expectations for more interest rate cuts by the Reserve Bank of New Zealand (RBNZ) and determine the near-term trajectory for the NZD/USD pair. Nevertheless, the aforementioned fundamental backdrop warrants some caution for bears.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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