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NZ Dollar Under Pressure ahead of CPI

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Fundamental analysis of Forex market

The New Zealand dollar has reversed directions and is down considerably on Thursday. Currently, NZD/USD is trading at 0.6986, down 0.61% on the day.

New Zealand CPI eyed

After the RBNZ grabbed the headlines on Wednesday and sent the New Zealand dollar sharply higher, attention now shifts to New Zealand CPI for the second quarter. The consensus is for a strong gain of 2.8% YoY, up sharply from 1.5% in Q1. Keeping in mind that the RBNZ has set an inflation target in the 1-3% range, the upcoming CPI release could well overshoot the target, which would raise pressure on the bank to tighten policy. A reading that is higher than expected should lift the New Zealand dollar.

With the RBNZ announcing that is halting asset purchases, the markets will be looking for hints as to when the bank plans to raise rates. The bank could hike as early as August, but could opt to wait. The upcoming CPI report will be a key consideration in the bank’s thinking – a weak inflation report would provide some breathing room, while a high reading would raise pressure on the RBNZ to raise rates.

Powell remains dovish

Inflation in the US is red-hot, but the Fed has maintained that this is a transitory event. Fed Chair Jerome Powell maintained this view in testimony before a House committee on Wednesday. Powell acknowledged that inflation has “increased notably”, but blamed the surge on temporary factors, such as shortages of used cars and semiconductors, and argued that inflation would ease when conditions returned to normal. Powell’s message to the markets was that the Fed would not change monetary policy before the economy showed “substantial progress”, notwithstanding the jump in inflation.

As US inflation levels continue to head higher, the markets have been looking for clues as to when the Fed will tighten policy and taper its bond purchases. Powell did not shed any light in this regard, saying only that Fed officials are discussing scaling back the pace of bond purchases.

NZD/USD Technical

  • There is resistance at 0.7095. Above, we find resistance at 0.7191
  • On the downside, there is support at 0.6913 which is protecting the round number of 0.6900. Below there is support at 0.6827