NZD/USD lower ahead of inflation expectations

• New Zealand releases inflation expectations
• Markets react positively to US inflation report

NZD/USD is trading at 0.6342, down 0.38% on the day.

New Zealand Inflation Expectations eyed

The Reserve Bank of New Zealand will be keeping a close eye on inflation expectations release early on Friday. Inflation expectations eased to 3.3% in Q1, down from 3.62% and the central bank will be hoping that the downswing continues. The RBNZ hiked by 50-basis points in April to 5.25% and meets next on May 24^th. The inflation expectations report will be the final inflation release prior to the meeting and could move the dial of the New Zealand dollar. A hot report will increase the chances of a rate hike at the next meeting, while a weak report will point to inflation falling and ease pressure on the RBNZ to raise rates.

US inflation report unlikely to sway Fed

US inflation in April dropped a notch, but the disinflation process appears to have stalled. Headline inflation ticked down to 4.9%, down from 5.0% in March. It was the same story with the core rate, which dropped from 5.6% to 5.5%. NZD/USD rose 0.40% and hit a 3-month high after the release, as investors focussed on a decline in CPI Core Services Ex-Housing.

I don’t expect this inflation release to sway the Fed’s rate policy, which is to keep rates elevated until inflation falls closer to the 2% target. Fed Chair Powell has hinted at a rate pause in June, and this has been widely priced in by the markets. The big question is what happens later in the year. Powell has insisted that rate cuts are not on the table, but the markets disagree and have priced in a 70% chance of a rate cut in September, according to the CME Group. A lot can happen before September, and if inflation falls more rapidly in the coming months, we may see the Fed rethink trimming rates, which would provide much-needed relief to consumers and businesses.

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NZD/USD Technical

• NZD/USD is testing support at 0.6352. The next support level is 0.6257
• There is resistance at 0.6482 and 0.6592

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