NZD/USD falls to 5-week low as inflation slows

• New Zealand inflation fell to 6.7%, lower than expected
• NZD/USD is down 0.40% and dropped to its lowest level since April 16
• Four members of FOMC will speak today

New Zealand inflation eases more than expected

Policy makers at the Reserve Bank of New Zealand are in a bubbly mood, as New Zealand’s inflation rate dropped to 6.7% in the first quarter, beating the market consensus of 7.1%. The RBNZ had braced for an acceleration to 7.3%, so the substantial drop was a welcome surprise.

The central bank has been heavy-handed in its battle with inflation. The RBNZ shocked the markets earlier this month when it delivered a 50-basis point hike, as the markets had anticipated a modest 25-bp move, given the lackluster New Zealand economy. The oversize hike brought the benchmark cash rate to 5.25%, the highest level of any major central bank. The RBNZ’s aggressive tightening has cooled the economy and appears to have finally broken the back of inflation. Another drop in inflation would strongly suggest that inflation has peaked, but it’s early to celebrate, as inflation still remains much higher than the target band of 1%-3%.

What’s next for the RBNZ? As things currently stand, I would expect a 25-basis point hike at the May 24^th meeting, although the central bank has a knack for surprising the markets. The key releases prior to the meeting include employment and inflation expectations, both of which will be closely watched for their potential impact on the rate decision.

In the US, unemployment claims are expected to nudge up from 239,000 to 240,000. Unless the estimate is wide of the mark, the release is unlikely to affect the US dollar. Investors will be keeping a close eye on four voting members of the FOMC who will deliver public remarks today. The Fed is expected to deliver a 25-basis point hike next month, which could wrap up the current rate-hike cycle.

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NZD/USD Technical

• NZD/USD is testing support at 0.6213. Below, there is support at 0.6127
• 0.6289 and 0.6368 are the next resistance lines

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