NZD/USD advances to near 0.5900 ahead of US PCE inflation data

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The NZD/USD pair extends its upside to near 0.5900 during the Asian trading session on Friday. The Kiwi pair strengthens as the market sentiment is favorable for riskier assets on firm expectations that the Federal Reserve (Fed) will cut interest rates in the September policy meeting.

NZD/USD gains further to near 0.5900 amid upbeat market mood.
Investors await the US PCE inflation data for fresh cues on the monetary policy outlook.
Cooling inflation expectations and RBNZ interest rate cut have improved NZ’s Business Confidence.

According to the CME FedWatch tool, there is an 85% chance that the Fed will reduce interest rates by 25 basis points (bps) to 4.00%-4.25% in the policy meeting in September.

On Thursday, Fed Governor Christopher Waller explicitly announced that he will support for adjustment in policy rates in the policy meeting next month. He added that there will be more cuts in next three-to-six months. The reasoning behind Waller’s dovish remarks is weakening labor market conditions, which could deteriorate further and quickly.

For more cues on the interest rate outlook, investors await the US Personal Consumption Expenditure Price Index (PCE) data for July, which will be published at 12:30 GMT. Economists expect the US core PCE inflation, which is Fed’s preferred inflation gauge, to have risen at a faster pace of 2.9% on year against 2.8% in June, with monthly figure rising steadily by 0.3%.

Ahead of the US PCE inflation data, the US Dollar Index (DXY), which tracks the Greenabck’s value against six major currencies, trades cautiously around 98.00.

In New Zealand (NZ), the Australia and New Zealand Bank (ANZ) reported on Thursday that Business Confidence in August has improved almost two points to 49.7 from 47.8 in July, partly by cooling inflation expectations, and an interest rate cut by the Reserve Bank of New Zealand (RBNZ).

Last week, the RBNZ reduced its Official Cash Rate (OCR) by 25 bps to 3%, as expected, and guided a dovish stance on the monetary policy outlook.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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