New Zealand dollar climbs on soft US inflation

The New Zealand dollar has posted strong gains on Thursday. NZD/USD is trading at 0.6102 in the North American session, up 0.34% on the day at the time of writing. Earlier, NZD/USD rose as much as 0.90% before retracting.

US inflation unexpectedly falls to 3.0%

US inflation for June dropped to 3.0% y/y, down from 3.3% in May and below the market estimate of 3.1%. This was the lowest inflation reading since June 2023. Monthly, CPI declined by 0.1%, down from zero in May and below the market estimate of 0.1%. Significantly, this was the first monthly deflationary reading since May 2020.

Core CPI wasn’t as flashy but also dropped in June. Annually, core CPI dropped to 3.3% y/y, down from 3.4% in May and below the market estimate of 3.4%. Monthly, core CPI dipped from 0.2% to 0.1%, below the market estimate of 0.2%.

The surprise decline in CPI has weakened the dollar against most of the majors as expectations for a rate cut in September have jumped to 86%, compared to 69% just a day ago, according to CME’s FedWatch. The Fed has maintained a cautious stance about rate hikes and in testimony to US lawmakers this week, Fed Chair Powell remained coy about the timing of a rate cut. We may see the Fed sound a bit more dovish following the soft inflation report.

In New Zealand, the Reserve Bank was more dovish than expected at the Wednesday meeting and the New Zealand dollar responded with a sharp decline. The markets had not expected a rate cut until late in the year but the surprise shift from the central bank has raised expectations of an earlier rate cut, perhaps as soon as the next meeting on August 14.

New Zealand food inflation declined by 0.3% y/y in June, following a 0.2% gain in May. It marked the first decline in food inflation since August 2018. On a monthly basis, food prices jumped 1% in June, compared to a 0.2% decline in May.

Later today, New Zealand will release the Manufacturing PMI for June. The PMI is expected to ease to 46.8 in June, down from 47.2 in May. This would mark a 15th straight contraction for the index, as manufacturing has been in a prolonged depression with no end in sight.
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NZD/USD Technical

• NZD/USD pushed past resistance at 0.6095 and 0.6125 earlier before retracting. The next resistance line is at 0.6168
• 0.6052 and 0.6022 are providing support

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