New Zealand dollar dips after soft GDP report

• New Zealand GDP declines by 0.1%
• Fed takes a pause, but sends hawkish message

The New Zealand dollar is in negative territory on Thursday, after surging 0.9% higher on Wednesday. In the European session, NZD/USD is trading at 0.6171, down 0.57%. US banks are closed for a holiday.

New Zealand’s economy shrinks, a bit

With the financial markets fixated on the Federal Reserve on Wednesday, New Zealand’s GDP release was overshadowed by Jerome Powell & Co. The economy contracted by 0.1% q/q in the first quarter, matching the consensus and higher than the -0.7% reading in Q4 2022. This means that technically, New Zealand is in a recession, with two consecutive quarters of negative growth. Still, the market reaction has not been dramatic, as the 0.1% decline is marginal. On an annualized basis, GDP in Q1 rose 2.9%, up from 2.3% in the previous quarter.

The Reserve Bank of New Zealand raised rates by 25 basis points in May, bringing the benchmark rate to 5.5%. The central bank will have some time to gauge the effect of its rate tightening, as it does not meet again until July 12th. The IMF weighed in on the Bank’s rate policy ahead of the GDP release, urging more tightening in order to bring down high inflation.

Federal Reserve delivers a hawkish pause

The Federal Reserve held rates unchanged on Wednesday, which is what the markets had expected, especially after this week’s inflation report which showed inflation falling to 4.0%. At the same time, the rate statement and economic projections for the fourth quarter were hawkish. The Fed revised GDP growth and a key inflation gauge higher while revising the unemployment rate lower. As well, the dot plot indicated two more small rate hikes this year.

Powell said after the decision that the Fed had not made a decision about the July meeting, but his message was clearly hawkish, and the markets have priced in a 71% probability of a July hike, according to CME FedWatch. Powell may have inflation on the run, but there’s still a way to go before the 2% target is achieved.

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NZD/USD Technical

• NZD/USD is testing support at 0.6169. Below, there is support at 0.6100
• 0.6208 and 0.6277 are the next resistance lines

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