New Zealand Dollar dips despite hotter inflation as fimer US Dollar outweighs

• New Zealand inflation accelerated more than expected in the second quarter, reinforcing expectations of further RBNZ rate hikes.
• Markets now expect several additional tightening moves from the central bank over the coming months.
• The US Dollar remains supported by safe-haven demand amid Middle East tensions, limiting the Kiwi's upside.

NZD/USD trades around 0.5835 on Tuesday at the time of writing, down a modest 0.07% on the day despite support for the New Zealand Dollar (NZD) from stronger-than-expected inflation data.

Data released by Statistics New Zealand showed that the Consumer Price Index (CPI) rose 1.5% QoQ in the second quarter, up from 0.9% in the previous quarter and above market expectations of 1.4%. On an annual basis, inflation accelerated to 4.1% YoY from 3.1%, beating the market consensus of 4% and reaching its highest level since December 2023.

The data strengthened expectations that the Reserve Bank of New Zealand (RBNZ) will continue tightening monetary policy. After raising the Official Cash Rate by 25 basis points to 2.5% at its July meeting, the central bank indicated that further rate increases were likely at upcoming meetings. According to Bloomberg, markets now expect another hike in either October or December, followed by an additional increase in February 2027.

NZD support builds as RBNZ hawkishness meets persistent inflation risks

Analysts at BBH argue that “above target inflation and a more favorable domestic growth outlook” continue to “argue for additional RBNZ rate hikes which is NZD supportive.” They note that at its last July 8 meeting, the RBNZ raised the Official Cash Rate 25 bps to 2.50% and indicated that “further OCR increases appear likely at upcoming meetings.” Echoing that hawkish bias, TD Securities warns that “upside risk to inflation remains given renewed Middle East tensions pushing Brent above $90,” and expects the central bank to “hike again in September, after it restarted its hiking cycle in July.”

However, the Kiwi's gains remain limited by the resilience of the US Dollar. Persistent tensions in the Middle East continue to support demand for safe-haven assets as the United States (US) maintains its military strikes against Iran and military exchanges continue across the region, even as diplomatic efforts remain underway.

In the United States, recent economic data continue to reinforce expectations of a more accommodative stance from the Federal Reserve (Fed). Fed funds futures are pricing an 84.5% chance that the central bank will leave interest rates unchanged at its July 29 meeting, up from 61.5% one month ago, according to the CME FedWatch tool. Meanwhile, the four-week average of the ADP Employment Change showed that US private employers added just 16.5K jobs per week in early July, highlighting a gradual slowdown in labor market momentum.