• NZD/USD trades within a narrow range ahead of the monetary policy meeting in New Zealand.
• Markets expect RBNZ rates to remain unchanged, with a potentially more hawkish bias.
• The US Dollar remains steady despite a recent slowdown in US inflation.

NZD/USD trades around 0.6040 on Monday at the time of writing, virtually unchanged on the day, as investors adopt a wait-and-see approach ahead of the Reserve Bank of New Zealand (RBNZ) policy decision due on Wednesday. The pair consolidates after its recent upward moves, with the market looking for fresh catalysts.

The RBNZ is widely expected to keep its Official Cash Rate unchanged at 2.25% at its first meeting of the year. However, the main focus is on forward guidance. Several market participants believe the central bank could adopt a more hawkish tone in response to persistent inflation risks. The latest data show that annual inflation increased by 3.1% in the fourth quarter, confirming a pickup in price pressures over recent quarters.

In addition, the latest survey on inflation expectations indicates that one-year and two-year expectations have risen, with the latter closely monitored as it reflects the horizon over which monetary policy decisions feed through to prices. This trend fuels speculation of an earlier-than-expected tightening, with some investors even considering a rate hike in the second half of the year if price pressures remain elevated.

Investors are also watching the fourth-quarter Wage Price Index, a key indicator to assess domestic price pressures. A quarterly increase of 0.8% is expected, which would confirm the resilience of the New Zealand labor market and could strengthen the case for a hawkish bias from the RBNZ.

On the US side, the US Dollar (USD) remains broadly stable despite a slowdown in inflation in January. The Consumer Price Index (CPI) rose 2.4% YoY, down from 2.7% previously, while monthly inflation eased to 0.2%. These figures support the view that the Federal Reserve (Fed) could consider rate cuts later in the year, although markets still assign a high probability to a pause at the next meeting.

In the near term, NZD/USD’s direction will largely depend on the tone adopted by the Reserve Bank of New Zealand. A more hawkish-than-expected message could support the New Zealand Dollar (NZD), while a cautious or balanced communication may extend the current consolidation phase.