New Zealand dollar slips despite solid services release

• NZD/USD is down sharply on Monday
• New Zealand services beat expectations
• US inflation expectations fall to March 2021 low

The New Zealand dollar is down sharply on Monday. In the European session, NZD/USD is trading at 0.6192 down 0.75%.

New Zealand Services PSI beats expectations

New Zealand’s services sector accelerated in May, as the Performance of Services Index rose from an upwardly revised 50.1 to 53.3 points. The 50.0 level separates contraction from expansion. The rebound was positive news after last week’s first-quarter GDP report, which dipped by 0.1% and marked a second straight decline. The services component of GDP came in at -0.6%, which indicates that the Reserve Bank of New Zealand’s rate tightening has reduced the demand for services. This is good news for the RBNZ, which is looking for the economy to cool in order to dampen inflation.

The Reserve Bank of New Zealand raised rates in May and has some time to gauge the impact of its rate tightening, as it does not meet again until July 12th. The weak GDP report is an indication that economic activity is slowing down, but inflation has been stickier than expected, falling to 6.7% in the first quarter, down from 7.2% in Q4 2022. This is much higher than the central bank’s target of 1%-3% and the RBNZ will likely have to tighten further, but that will make a soft landing a tricky task. The International Money Fund has urged New Zealand to continue its rate-tightening campaign in order to bring down inflation.

US inflation expectations fall

In the US, UoM inflation expectations eased to 3.3% in June, down sharply from 4.2% in May and lower than the 4.1% consensus. Inflation expectations haven’t been this low since March 2021 and this is another indication that inflation is heading lower. The UoM Consumer Sentiment survey rose from 59.2 to 63.9, boosted by the drop in inflation expectations as well as the resolution of the banking crisis, according to the survey.

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NZD/USD Technical

• NZD/USD is testing support at 0.6198. Below, there is support at 0.6130
• 0.6276 and 0.6340 are the next resistance lines

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