• The New Zealand Dollar weakens against the US Dollar ahead of the Reserve Bank of New Zealand's policy decision.
• Renewed geopolitical tensions in the Strait of Hormuz boost demand for the US Dollar.
• Markets expect the RBNZ to deliver a 25-basis-point rate hike but remain skeptical about further policy tightening.

NZD/USD trades around 0.5685 at the time of writing on Tuesday, down 0.26% on the day. The pair remains under pressure as the US Dollar (USD) attracts renewed demand following fresh geopolitical tensions in the Middle East, while investors await the Reserve Bank of New Zealand's (RBNZ) monetary policy decision.

According to Bloomberg, citing a US official, Iran fired at least two missiles at commercial vessels transiting the Strait of Hormuz late Monday. Two ships sustained significant damage without any reported casualties, while the UK Maritime Trade Operations also confirmed that a tanker was struck by an unidentified projectile. The escalation in tensions has supported safe-haven flows and strengthened the US Dollar.

Meanwhile, expectations for Federal Reserve (Fed) monetary policy continue to evolve following the recent slowdown in the US labor market. Investors now expect the Fed to keep interest rates unchanged at its July and September meetings, while lower Oil prices, driven by an output increase from the Organization of the Petroleum Exporting Countries and its allies (OPEC+) and the US-Iran peace agreement, continue to ease inflationary pressures.

Attention now turns to the Reserve Bank of New Zealand's (RBNZ) policy decision due on Wednesday. ING expects the central bank to deliver a 25-basis-point rate hike, taking the Official Cash Rate to 2.5%, describing the move as an "insurance" hike. However, the bank believes the increase could prove to be a one-off move, limiting its positive impact on the New Zealand Dollar (NZD).

Several institutions share this cautious view. Commerzbank believes a rate hike could provide initial support to the Kiwi but argues that markets are already pricing in around 3.5 rate hikes over the next 12 months, a scenario it considers overly optimistic. Rabobank also believes that tightening expectations have become too aggressive and warns that a repricing of those expectations could weigh on the currency in the coming months. Meanwhile, BBH expects a 25-basis-point rate hike as well but argues that any NZD strength is likely to be short-lived before markets shift their focus to the central bank's forward guidance.