Can the New Zealand Dollar resist pressure against the US Dollar as traders weigh a bigger Fed rate hike?

US Dollar strength keeps NZD/USD under pressure around 0.5560.
A new 18-month peak near 103.06 marks the US Dollar Index’s latest advance.
A larger December interest rate hike by the Fed is also entering traders’ calculations.

Selling pressure persists on the New Zealand Dollar (NZD) against the US Dollar (USD) during Thursday’s Asian session, with the pair hovering around 0.5560 after two days of losses.

Continued US Dollar outperformance leaves the Kiwi pair on a weak footing. Financial markets have begun factoring in the possibility that the Federal Reserve (Fed) could opt for a larger interest rate increase at its December policy meeting.

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The US Dollar Index (DXY) is up 0.18% at around 103.06 at the time of writing, putting it at its highest in over 18 months. The index measures the Greenback against six major currencies.

Do Waller’s remarks put a 50bp Fed hike back in focus?

The latest reassessment in markets has been “to consider the prospect of a 50bp hike,” according to analysts at MUFG. They emphasise that the possibility is “only now being considered because of Waller’s comments prior to the Consumer Price Index (CPI) report rather than the CPI report itself.” Explaining the debate, they point out that “Waller’s comment that a stronger CPI print may warrant a 50bp hike has sparked a debate over whether Waller had knowledge of the CPI print,” contributing to higher front-end yields and a repricing of Fed expectations.

A 9/10 FXS Speechtracker score for Tuesday’s remarks by the Fed’s Waller, compared with a historical average of 7.3/10, highlights a distinctly more hawkish message and a clear tilt towards tighter policy. Waller conditionally backed a half-point rate increase in December if October core CPI comes in at 0.3% or above, while supporting a quarter-point increase even if inflation data improves. That stance indicates a forceful policy response to any evidence of inflation moving away from target. His focus on broad-based price rises, policy that is not sufficiently restrictive and the need to raise real rates adds to upside risks for US yields and lends support to the Dollar. At the same time, his pessimism about near-term productivity gains from AI points to limited scope for supply-side disinflation to provide relief.

An increase of 3.17 points took the FXS Fed Sentiment Index to 145.50, placing it firmly in hawkish territory and aligning with the high FXS Speechtracker score. The rise confirms a more aggressive tilt towards further tightening in Fed communication. As markets reassess the probability of December rate hikes, that backdrop should underpin the Dollar and put pressure on risk-sensitive currencies.

Despite this, the CME FedWatch tool puts the probability of a 50 basis points (bps) interest rate increase at the December meeting at just 10%.

For the Kiwi, expectations surrounding the Reserve Bank of New Zealand (RBNZ) policy meeting in December would be the main driver. After keeping its Official Cash Rate (OCR) unchanged at the October meeting, the RBNZ is likely to lift it by 25 basis points (bps) to 3%. Against a backdrop of upside inflation risks, the central bank signalled that “tighter monetary policy probably needed”.

What Does the Technical Outlook Suggest for NZD/USD?

Trading at 0.5559 on the daily chart, NZD/USD has moved further below its 20-period exponential moving average (EMA) of 0.5618, leaving the near-term outlook bearish. Its position beneath this short-term trend gauge suggests that rebounds remain constrained. Meanwhile, a Relative Strength Index (14) reading near 39 indicates selling pressure following the latest decline, though not at an extreme level.

Any corrective recovery would first face resistance at the 20-day EMA of 0.5618. Only a sustained move above that threshold would soften the prevailing bearish bias. Without a recovery above it, NZD/USD remains exposed to new lows, with support likely to appear only at lower historical price floors that are not shown by the current set of indicators.

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

US Dollar: Key Questions Answered

What role does the US Dollar play?

Alongside its status as the official currency of the United States of America, the US Dollar (USD) serves as the ‘de facto’ currency in a significant number of other countries, circulating together with their local banknotes. No other currency is traded as heavily worldwide: data from 2022 puts its share of global foreign exchange turnover at over 88%, equivalent to average daily transactions of $6.6 trillion. After the Second World War, the USD displaced the British Pound as the world’s reserve currency. Gold backed the US Dollar through most of its history, until the Bretton Woods Agreement in 1971 brought an end to the Gold Standard.

Why do Federal Reserve decisions move the US Dollar?

Monetary policy, determined by the Federal Reserve (Fed), is the single biggest influence on the US Dollar’s value. Achieving price stability by controlling inflation and promoting full employment are the Fed’s two mandates. Adjustments to interest rates are its main means of pursuing both objectives. If prices climb too rapidly and inflation exceeds the Fed’s 2% target, the central bank raises rates, supporting the USD. Conversely, inflation below 2% or an excessively high Unemployment Rate may prompt the Fed to cut rates, putting pressure on the Greenback.

How does Quantitative Easing work, and what does it mean for the US Dollar?

When conditions become extreme, printing additional Dollars and introducing quantitative easing (QE) are also options for the Federal Reserve. Through QE, the Fed sharply expands the supply of credit to a financial system that has stalled. This unconventional policy is used when lending has dried up because banks, fearing counterparty defaults, are unwilling to lend to one another. It is a last-resort measure when interest rate cuts alone are unlikely to deliver the required outcome. During the Great Financial Crisis in 2008, QE was the Fed’s preferred response to the credit crunch. Under the programme, the Fed prints additional Dollars to purchase US government bonds, mainly from financial institutions. The US Dollar typically weakens as a result of QE.

How does Quantitative Tightening work, and what does it mean for the US Dollar?

The opposite process is quantitative tightening (QT). Under QT, the Federal Reserve halts bond purchases from financial institutions and refrains from reinvesting the principal received as its existing bond holdings mature. This generally supports the US Dollar.