NZD Drops as RBNZ Eases Policy Guidance & Insights from Powell’s Testimony

RBNZ Confident in Hitting Inflation Targets

The New Zealand dollar had a notable drop yesterday afternoon, falling about 0.6% against both the US dollar and the Australian dollar. This movement brought the NZD/USD pair close to the 0.6000 support level and pushed the AUD/NZD pair up towards 1.1100. This shift was largely due to the Reserve Bank of New Zealand's (RBNZ) latest policy update, which showed a more relaxed policy approach.

NZDUSD H1 

 Source: Finlogix ChartsIn their latest statement, the RBNZ emphasized that their tight monetary policy has significantly reduced consumer price inflation. They now expect inflation to return to their target range of 1 to 3 percent in the latter half of the year. This faster-than-expected decline is due to falling domestic price pressures and lower costs for imported goods and services. A weakening job market has also helped reduce domestic inflation, as businesses are hiring less cautiously. Additionally, increased immigration has expanded the labour supply, easing labour market conditions.

RBNZ Rate Statement 

 Source: Reserve Banks New Zealand (Click here to read the full monetary policy report) The RBNZ's confidence in continued inflation reduction is supported by signs of easing inflation persistence, aligning with reduced capacity pressures and business pricing intentions. The central bank's tight policy is also slowing economic activity, including business and consumer investment and spending. Given these factors, the RBNZ believes its restrictive policy is effectively curbing growth and inflation. 

They adjusted their guidance to suggest that the extent of monetary restraint will ease over time, matching the expected decline in inflation pressures.

This updated policy guidance has boosted market confidence that the RBNZ will start lowering rates later this year, contrasting with their May guidance, which suggested rate cuts in the second half of next year. However, there is a possibility that the market is prematurely pricing in earlier and deeper cuts. Today’s more lenient policy update has also widened the gap between the RBNZ and the Reserve Bank of Australia (RBA), which is considering further rate hikes over the summer. This difference poses potential upside risks for the AUD/NZD pair.

AUDNZD H1 Chart 

 Source: Finlogix ChartsAnticipation Builds Ahead of US CPI Report After Powell’s Testimony

The focus yesterday was on Federal Reserve Chair Jerome Powell’s semi-annual testimony on monetary policy before the Senate Banking Committee. Despite high expectations, the testimony had a limited impact on the US dollar and US yields, which saw only modest increases. The dollar index managed to rebound off the 105.00 support level.

USA CPI 

 Source: Finlogix Economic CalendarIn his testimony, Chair Powell reiterated the policy message from the June FOMC meeting, where the updated DOT plot indicated that FOMC participants now favour only one rate cut this year. Powell acknowledged that US economic growth has moderated in the first half of this year, following strong performance in the second half of the previous year. Although consumer spending has recently slowed, it remains solid, and the labour market is strong but not overheated.

Regarding inflation, Powell noted that recent monthly readings have shown modest progress, but the Fed is not yet confident enough to start lowering rates. The central bank wants to see more consistent positive data before making such a move. However, Powell did emphasize that the risks to their inflation outlook have become more balanced. The Fed is now more cautious about the risk of maintaining high rates for too long, which could excessively weaken economic activity and employment.

During the Q&A session, Powell mentioned that the Fed is closely monitoring the labour market and could consider lowering rates if unexpected weakness emerges. Market attention is now turning to the release of the US CPI report for June. Another softer inflation print would support the outlook for the Fed to begin cutting rates in September, which could lead to a weaker US dollar.

You can see both speeches on this link:10/07/2024: https://www.youtube.com/watch?v=uHQ6H572UOc11/07/2024: https://www.youtube.com/watch?v=MmPArwPC6pM

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