NZD/USD falls but bounces off daily lows ahead of the RBNZ’s interest rate decision

• NZD/USD drops during the day by some 0.36% as investors prepare for the RBNZ.
• Mixed US economic data reignited recession fears in the US.
• The RBNZ is expected to hike the OCR by 50 bps to 3% on Wednesday.

The NZD/USD tumbles in the North American session, due to broad US dollar strength, despite a risk-on impulse in the financial markets, after US economic data came mixed, so recession fears reemerged. At the time of writing the NZD/USD is trading at 0.6341, down 0.35%.

US equities reflect investors’ upbeat mood, courtesy of positive US data. Industrial Production for July increased at a 0.6% MoM pace, exceeding estimations, underpinned by motor vehicle sales. Even though the news was positive, the Building Permits and Housing Starts missing estimations, recording negative prints, put a cap on higher US dollar prices.

Therefore, the NZD/USD trimmed some of its earlier losses after hitting a daily low at 0.6316. However, a monetary decision of the Reserve Bank of New Zealand (RBNZ) looming keeps NZD/USD buyers hopeful of higher prices, with expectations of a 50 bps hike fully priced in.

According to a Reuters poll, the RBNZ is expected to increase the Overnight Cash Rate (OCR) by 50 bps to 3.00%, which would be its most aggressive tightening since 1999.

Also read: RBNZ Preview: Forecasts from five major banks, all eyes on future policy path

In the meantime, five major banks, in their previews, expect that the RBNZ will hike rates by 50 bps on Wednesday, but there are some differences regarding the forward guidance the bank will use.

ANZ and Westpac expect a hawkish commentary, and the central bank would clearly communicate that the fight against inflation is well underway.

Bank of America estimates that guidance would remain hawkish, but they expect the bank to add “conditionality” on the scale of following rate hikes. Additionally, expect the bank to acknowledge that growth is softening.

TDS estimates the bank will emphasize that inflation risks are skewed to the upside and should dominate the RBNZ’s communication. Contrarily, ING estimates the bank would hike 50 bps but suggests the RBNZ “will have to revise its rate path projections lower.”

What to watch

On Wednesday, the Reserve Bank of New Zealand will unveil its monetary policy decision. On the US front, the docket will feature US Retail Sales, FOMC’s July minutes, and Fed speaking.

NZD/USD Key Technical Levels