NZD/USD weakens below 0.5850 amid Iran war concerns, Fed rate decision looms
NZD/USD softens to near 0.5820 in Tuesday’s early European session. The Iran war is complicating the Fed’s outlook, which is set to meet on Wednesday for its next rate decision.Traders will take more cues from New Zealand’s Q4 GDP data, which is due on Thursday.The NZD/USD pair attracts some sellers to around 0.5820 during the early European trading hours on Tuesday. The US Dollar (USD) edges higher against the Kiwi as traders weigh developments in the Iran war. The US Federal Reserve (Fed) interest rate decision will take center stage later on Wednesday, with no change in rates expected.
The Middle East as the US-Israeli war on Iran entered its third week. Markets seem worried that a surge in Crude Oil prices following the US-Israel strikes on Iran would revive inflationary pressures and force the US central bank to delay cutting interest rates. The Fed is expected to keep its benchmark interest rate unchanged in the current range of 3.50% to 3.75% on Wednesday.
Traders will closely monitor Fed Chair Jerome Powell’s remarks after the rate decision. The press conference on Wednesday may be Powell’s second to last, as his term as chair is set to end in May. Any hawkish comments from Fed officials could lift the Greenback and act as a headwind for the pair in the near term.
The attention will shift to New Zealand’s Gross Domestic Product (GDP) for the fourth quarter (Q4) on Thursday. The quarterly and annual GDPs are projected to grow by 0.4% and 1.6%, respectively. If the reports show stronger-than-expected outcomes, this could boost the Kiwi against the USD.
The New Zealand Dollar (NZD), also known as the Kiwi, is a well-known traded currency among investors. Its value is broadly determined by the health of the New Zealand economy and the country’s central bank policy. Still, there are some unique particularities that also can make NZD move. The performance of the Chinese economy tends to move the Kiwi because China is New Zealand’s biggest trading partner. Bad news for the Chinese economy likely means less New Zealand exports to the country, hitting the economy and thus its currency. Another factor moving NZD is dairy prices as the dairy industry is New Zealand’s main export. High dairy prices boost export income, contributing positively to the economy and thus to the NZD.
How do decisions of the RBNZ impact the New Zealand Dollar?The Reserve Bank of New Zealand (RBNZ) aims to achieve and maintain an inflation rate between 1% and 3% over the medium term, with a focus to keep it near the 2% mid-point. To this end, the bank sets an appropriate level of interest rates. When inflation is too high, the RBNZ will increase interest rates to cool the economy, but the move will also make bond yields higher, increasing investors’ appeal to invest in the country and thus boosting NZD. On the contrary, lower interest rates tend to weaken NZD. The so-called rate differential, or how rates in New Zealand are or are expected to be compared to the ones set by the US Federal Reserve, can also play a key role in moving the NZD/USD pair.
How does economic data influence the value of the New Zealand Dollar?Macroeconomic data releases in New Zealand are key to assess the state of the economy and can impact the New Zealand Dollar’s (NZD) valuation. A strong economy, based on high economic growth, low unemployment and high confidence is good for NZD. High economic growth attracts foreign investment and may encourage the Reserve Bank of New Zealand to increase interest rates, if this economic strength comes together with elevated inflation. Conversely, if economic data is weak, NZD is likely to depreciate.
How does broader risk sentiment impact the New Zealand Dollar?The New Zealand Dollar (NZD) tends to strengthen during risk-on periods, or when investors perceive that broader market risks are low and are optimistic about growth. This tends to lead to a more favorable outlook for commodities and so-called ‘commodity currencies’ such as the Kiwi. Conversely, NZD tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.
