The NZDUSD pair is experiencing an upward trend due to the weakened US dollar, impacted by dovish expectations linked to the FOMC meeting. The US dollar fell after a weak NFP report on Friday, leading to increased expectations for the Federal Reserve to cut rates, potentially by 70 basis points by year-end. There is an 8% chance of a 50 basis point cut in September, contingent on a soft CPI report.
The US dollar remains range-bound, affected by dovish bets on the Fed, though it’s possible that bearish positions on the dollar are exaggerated. Should rate cuts result in strong economic activity, future rate cuts might be adjusted, supporting the dollar. However, a reversal in the trend would require strong economic data.
The RBNZ’s Impact on the Pair
The RBNZ’s recent dovish actions contributed to the NZDUSD pair’s rally, with an unexpected rate cut and further cuts anticipated. The pair reached a pivotal trendline, where sellers may attempt to push the exchange rate back to the 0.5850 support zone, while buyers aim for a breakout toward the 0.6050 resistance level.
On the charts, a pullback could see buyer activity around 0.5920, with sellers looking to capitalize on a break towards 0.5850 support. Key economic reports this week include the US PPI report, US CPI, and Jobless Claims figures, concluding with the University of Michigan Consumer Sentiment report.
The US dollar’s weakness is the main story for us, pushing the NZDUSD pair higher as we head into the next Federal Reserve meeting. Last Friday’s Non-Farm Payrolls report on September 5th came in soft, showing only 110,000 jobs were added against an expected 180,000, which has fueled bets on interest rate cuts. This has solidified the market view that the Fed will act to support the economy.
Market pricing now reflects expectations for three rate cuts by the end of 2025, according to trading in fed funds futures. The probability of a rate cut at the September FOMC meeting has jumped to over 85%, with a small but notable 8% chance of a large 50 basis point cut. A soft inflation report tomorrow would almost certainly lock in these dovish expectations and could send the dollar even lower.
Impact of Inflation Report
Tomorrow’s Consumer Price Index (CPI) report is now the most critical event of the week. Economists are forecasting the annual inflation rate to have cooled to 3.0%, and a number at or below this level would confirm the trend of disinflation. For derivative traders, this could be a clear signal to position for further dollar downside through short-dated options.
We must also consider the possibility that bearish sentiment on the dollar is reaching an extreme. We saw a similar situation in early 2024 when the market priced in aggressive cuts that never materialized because the economy remained strong. If the upcoming rate cuts successfully stimulate growth, the Fed could signal fewer cuts for 2026, which would quickly reverse the dollar’s decline.
On the New Zealand side, the Reserve Bank of New Zealand remains quite dovish itself following its August rate cut. Their projections for two more cuts this year mean the NZDUSD rally is happening despite local fundamentals, not because of them. This makes the pair’s strength entirely dependent on continued US dollar weakness.
From a derivatives standpoint, the NZDUSD is testing a major trendline that has historically served as strong resistance. Options traders could consider buying puts or establishing bear call spreads near this level, using a break above the trendline as a clear point to exit the position. This strategy offers a defined risk on the view that the rally is getting overextended.
For those looking at shorter timeframes, the 0.5920 level acts as a minor support zone. A pullback to this area could be an opportunity for buying short-term calls, anticipating a bounce. However, a decisive break below this support would likely embolden sellers, making put options targeting the larger 0.5850 support zone an attractive trade.
