New Zealand Dollar gains even as RBNZ rate hike expectations ease

• Falling oil prices are easing inflationary pressures and tempering RBNZ rate rise expectations, potentially weighing on NZD/USD.
• Growing expectations of a Fed rate rise could extend gains in the US Dollar Index.
• A December rate rise carries a probability of nearly 91%, according to the CME FedWatch Tool.

After losing over 0.5% the previous day, NZD/USD is edging up to around 0.5600 in Wednesday’s Asian session. Further gains could nevertheless be limited by potential headwinds for the New Zealand Dollar (NZD). The prospect of lower oil prices is helping to contain inflationary pressures, reducing market expectations of future interest rate rises from the Reserve Bank of New Zealand (RBNZ).

Ongoing coalition talks are also under close scrutiny from market participants. After incumbent Finance Minister Nicola Willis failed to hold her parliamentary seat, labour market leaders identified National's Simeon Brown and Labour's Barbara Edmonds as the leading contenders to take on the finance portfolio.

Following the latest US inflation figures, increased expectations of a December interest rate rise by the Federal Reserve (Fed) could support the US Dollar (USD) against the New Zealand Dollar. Markets now assign approximately a 91% probability to an increase next month, according to the CME FedWatch Tool.

October’s US Consumer Price Index increased by 0.4% month on month. Although this was slower than September’s 0.6% rise, it exceeded the 0.3% forecast. Excluding food and energy prices, Core CPI advanced 0.3%, maintaining September’s pace and surpassing the 0.2% estimate. Annual figures for October were not included by the Bureau of Labor Statistics because of last year’s government shutdown.

Dollar gains support as Goolsbee’s ‘real inflation issue’ warning strengthens hawkish Fed signals

An FXS Speechtracker score of 8/10, compared with a historical average of 6.8/10, reflected a distinctly more hawkish message from the Fed’s Goolsbee and heightened concern over persistent price pressures. His description of the latest CPI as “borderline disturbing,” alongside services inflation “not coming down” and a “real inflation issue on our hands,” points to increasing unease about sticky inflation and less tolerance for upside surprises. By stressing that “everything is always on the table” and that the Federal Reserve “must get inflation down to target”, he reinforced the risk of fresh tightening or a prolonged restrictive stance. Such a combination typically supports the Dollar while weighing on risk-sensitive currencies.

A 1.69-point increase took the FXS Fed Sentiment Index to 145.61, signalling a clear move further into hawkish territory consistent with the elevated FXS Speechtracker score. Given how far the index stands above the neutral 100 level, markets are likely to view Goolsbee’s remarks as reinforcing expectations that rates will stay higher for longer. This should lend support to the Dollar while maintaining pressure on the Euro, Yen and other low-yielding currencies.