NZD drifting, Business Confidence dips

The New Zealand dollar is showing little movement on Wednesday. In the European session, NZD/USD is trading at 0.7205, up 0.12% on the day.

New Zealand economic releases were lukewarm. Manufacturing Sales posted a weak gain of 0.4% in Q1, following a 0.4% gain in the fourth quarter of 2020. Preliminary ANZ Business Confidence Index for June indicated that business confidence fell 2 points to -0.4%. Still, the index showed that business conditions have remained firm in the first half of 2021.

Importantly, inflation expectations stand at 2.3%, the highest level since November 2017. We have seen how rising inflationary pressures in the United States has become a key theme for the markets, and the RBNZ is no doubt keeping a close eye on this reading, as inflation expectations can translate into actual inflation numbers. The RBNZ inflation target is a range of 1%-3%, so the 2.3% figure is above the central bank’s target midpoint. The increase in inflation can be partly attributed to temporary supply disruptions. Still, if inflation releases point upwards, the RBNZ, like the Fed, will be under pressure to tighten policy.

In the US, all eyes will be on the May CPI release, which will be published on Thursday. In April, US inflation surged to a 13-year high, shaking up the financial markets. The jump in inflation caused speculation that the Fed might consider a taper of its massive stimulus program and this gave the US dollar a brief boost.

Last week’s nonfarm payroll report, which was weaker than expected, has taken off some of the pressure on the Fed to tighten monetary policy. The Fed has insisted that inflation is transient, but the markets aren’t completely buying in. If the upcoming CPI release is higher than expected, the Fed will be forced once again to defend its dovish monetary policy.

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NZD/USD Technical

• There is resistance at 0.7291 and 0.7370
• On the downside, we have support at 0.7129 and 0.7046

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