NZD/USD refreshes two-year low at 0.5880 ahead of Fed’s interest rate policy

• NZD/USD has printed a fresh two-year low at 0.5883 as investors await Fed policy.
• Investors have started incorporating the impact of hawkish Fed policy into risk-sensitive assets.
• Kiwi bulls failed to capitalize on upbeat Business NZ PMI data.

The NZD/USD pair has slipped below Tuesday’s low and has refreshed its two-year low at 0.5883 in the Tokyo session. The kiwi bulls look extremely weak and are expected to decline further as the US dollar index (DXY) is preparing for a fresh rally ahead of the interest rate decision by the Federal Reserve (Fed). The DXY has defended the momentum loss and is looking to resume its upside journey. The mighty DXY has refreshed its two-week high above 110.30.

In order to address the foremost priority of bringing price stability to the US economy, the Fed is going to hike the interest rates significantly. As per the CME FedWatch tool, the chances of announcing a 75 basis point (bps) rate hike are 82%. While a full percent rate hike alternative carries an 18% probability. As market participants are already incorporating the impact of higher interest rates in the risk-perceived and risk-averse assets, the focus is shifting towards interest rate guidance.

The survey from the Financial Times this week indicates that the interest rates will top around 4-5% in 2023. However, the aggressive approach will stay longer beyond 2023. An adaptation of a ‘neutral’ policy will be optimal if the Fed policymakers observe a series of slowdowns in the inflation rate.

Meanwhile, kiwi bulls have failed to capitalize on upbeat Business NZ PMI. The economic data landed at 58.6, much higher than the prior release of 54.4. The unchanged monetary policy by the People’s Bank of China (PBOC) weakened the kiwi bulls. A dovish stance on Prime Lending Rate (PLR) was expected by the PBOC amid commitment towards spurting growth outlook and inflation rate.