NZD/USD remains steady as markets assess New Zealand’s inflation data and rising trade tensions between the EU and US. A weaker US Dollar assists the New Zealand Dollar, despite CPI figures coming in lower than expected.

Inflation in New Zealand for the second quarter registered at 0.5%, under the 0.6% forecast, and fell from 0.9% previously. The annual inflation rate came in at 2.7%, below predictions of 2.8%, though higher than the previous year’s 2.5%.

Reserve Bank Reaction

The Reserve Bank of New Zealand remains alert to economic slowdown indicators, contemplating potential rate cuts should disinflation persist. Economic momentum in sectors like business investment, household spending, and the labour market is softening, as indicated by Acting RBNZ Governor Christian Hawkesby.

The US Dollar’s decline is motivated by US-EU trade tensions, with the US proposing increased tariffs on EU imports. Such tensions may lend support to the NZD, which avoided further losses due to these developments.

Technical analysis shows NZD/USD stabilising above support with a potential hanging man pattern indicating weakening bullish momentum. A decisive move above 0.6000 could favour bulls, while a drop below 0.5951 might lead to further decline.

Potential Market Volatility

We see the current stability in the currency pair as a temporary calm before a potentially volatile period. The lower-than-expected inflation data points to underlying weakness in New Zealand’s economy. This reinforces the cautious tone from the central bank about a potential slowdown.

The commentary from Hawkesby is critical; it signals that the door for rate cuts is wide open if the data continues to soften. We’ve seen this before, such as in the 2019 easing cycle, where the central bank acted swiftly on signs of weakening momentum. The latest ANZ Business Outlook survey supports this, showing a drop in business confidence to -14.7 in June, which suggests investment and hiring may continue to cool.

On the other side of the equation, the US Dollar’s trajectory provides a buffer for the Kiwi. Recent US inflation data also showed a modest cooling, with the annual CPI rate ticking down to 3.3% in May, which encourages speculation of Federal Reserve rate cuts. This has kept the US Dollar Index (DXY) from breaking higher, providing indirect support for the NZD/USD.

The technical picture of a potential “hanging man” pattern should not be ignored, as it indicates buying pressure is fading. Given the conflicting fundamental drivers, we believe a breakout is imminent. The market is caught between a dovish domestic outlook and a potentially weakening international counterpart.

In this environment, we would avoid taking a strong directional view and instead prepare for increased price movement. Traders should consider using options to buy volatility, such as a long straddle, which would profit from a significant price move in either direction. This strategy is ideal when a breakout from the current 0.5951 to 0.6000 range is anticipated but the direction is uncertain.

For those concerned about the downside risk posed by the central bank, purchasing put options with a strike price below the key support level offers a solid hedge. This acts as an insurance policy against a surprise rate cut or a sudden negative shift in global risk sentiment. It allows traders to protect capital while still being positioned to benefit if US dollar weakness prevails.

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