NZ dollar jumps on inflation expectations

The New Zealand dollar has posted strong gains on Thursday. NZD/USD is currently trading at 0.7041, up 0.60% on the day.

Inflation Expectations accelerates

New Zealand release inflation expectations and the indicator climbed for a sixth successive session. The indicator is carefully monitored since inflation expectations can manifest into actual inflation. The third-quarter release came in at 2.96%, up from 2.27%. The strong reading provided a boost for the New Zealand dollar and has strengthened the likelihood of the RBNZ raising rates at its policy meeting next week. The RBNZ was one of the first central banks to raise rates since the pandemic started, with a 25-bps hike in October. The central bank plans a series of hikes going into 2022, and the main question facing the markets is will the bank raise rates by 25 bps or show an aggressive hand with a 50-bps jump.

In the US, inflation continues to climb, but higher prices didn’t put a damper on consumer spending, as retail sales climbed 1.7% in October, up from 0.7% beforehand. Core retail sales showed an identical gain, up from 0.8%. There is a growing concern in the markets that the Fed will have to respond to the surge in inflation, as the argument that inflation is transient is looking out of touch with the realities on the ground. If the Fed trims its purchases, we could see some volatility in the financial markets.

The White House is feeling the pain of inflation, as US voters could punish the Democrats in the 2022 mid-term election over higher prices. President Joe Biden also has to make a key decision shortly as to who will head the Federal Reserve. Jerome Powell and Fed member Lael Brainard are the favorites, and Brainard is considered more dovish, which could mean that interest rates stay lower for a longer period, which would be bullish for equities and bearish for the US dollar.

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NZD/USD Technical

• There is resistance at 0.7146 and 0.7252
• 0.6966 is a weak support line. Below, there is support at 0.6892

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