Inflation surprise fails to lift NZD as rate cut weighs on sentiment
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Daily Currency Update
The New Zealand dollar's attempt at a recovery lost steam during Monday’s European session, as NZD/USD failed to break above the US$0.5750 resistance level. The pair briefly climbed in response to hotter-than-expected domestic inflation data and improved economic signals from China, but gains were quickly pared, with the pair retreating to US$0.5725 at the time of writing.New Zealand's latest Consumer Price Index (CPI) figures surprised to the upside, raising fresh questions about the Reserve Bank of New Zealand’s (RBNZ) recent dovish pivot. According to Stats New Zealand, inflation accelerated to 3.0% year-on-year in the third quarter, its highest level in 15 months, up from 2.7% in the second quarter.
On a quarterly basis, consumer prices rose 1.0%, doubling the 0.5% increase recorded in Q2 and coming in well above consensus forecasts. The surge in inflation was driven primarily by a sharp 11.3% increase in electricity prices, while persistent strength in rents and food costs also contributed.
These figures point to broad-based price pressures that could complicate the central bank’s policy path. The hotter inflation print comes just weeks after the RBNZ surprised markets by cutting its official cash rate by 50 basis points, more than expected, signalling growing concern about sluggish domestic growth. The central bank also hinted at the possibility of further easing measures to support an economy weighed down by weak consumer spending, a soft housing market and a deteriorating global trade environment.
This policy divergence, between stubborn inflation and a central bank leaning toward further accommodation, has left investors cautious. While strong CPI data might ordinarily boost a currency on expectations of tighter monetary policy, the RBNZ’s dovish stance appears to be capping upside potential for the kiwi. Also supporting the NZD, albeit temporarily, was improved data from China, New Zealand’s largest trading partner.
A slightly better-than-expected quarterly GDP growth figure from Beijing provided some relief to risk-sensitive currencies, reinforcing hopes that the worst may be over for China’s fragile recovery. Nevertheless, concerns over China's longer-term economic outlook, especially in the property sector, continue to cloud sentiment.
Looking ahead, the path of NZD/USD is likely to remain choppy as markets digest conflicting signals: stronger inflation and external demand on one hand, and a central bank committed to easing on the other. Further clarity may emerge from upcoming speeches by RBNZ officials or new guidance on inflation projections and the economic growth trajectory. Until then, the kiwi remains under pressure, with markets wary of pricing in sustained gains amid ongoing policy uncertainty.
Key Movers
The US Dollar Index (DXY), which tracks the performance of the greenback against a basket of six major currencies, is under pressure at the start of the week, trading around 98.50 at the time of writing. The US dollar’s decline reflects a combination of political uncertainty in Washington and growing market conviction that the Federal Reserve will pivot toward more accommodative monetary policy before the end of the year.Despite easing tensions between the United States and China, which have helped calm global markets, the US dollar has struggled to regain momentum. Investor sentiment remains cautious amid a protracted US government shutdown, now in its 19th day, with no resolution in sight. On Thursday, senators failed for the tenth time to pass legislation to reopen the government, underscoring the deep partisan divide in Congress.
The current funding lapse has now become the third-longest in modern US history, raising concerns about the economic and political fallout should the deadlock continue. The shutdown has already disrupted key federal services and delayed the release of economic data, adding a layer of uncertainty for investors and policymakers alike. Analysts warn that a continued impasse could begin to weigh more heavily on consumer and business confidence, potentially denting growth in the months ahead.
Against this backdrop, expectations for Federal Reserve rate cuts have surged. According to the CME FedWatch Tool, markets are now fully pricing in a 25-basis-point cut at the October meeting, with a 96% probability of a second cut in December. This shift in market expectations reflects not only the political paralysis in Washington but also lingering concerns about slowing global growth, subdued inflation and tightening financial conditions.
While the Fed has so far maintained a cautious tone, recent comments from several policymakers have signalled a growing openness to policy easing if downside risks to the economic outlook persist. For now, the US dollar appears caught between waning geopolitical tension and domestic headwinds that may force the central bank’s hand sooner rather than later.
Further moves in the DXY will likely hinge on developments in Washington, particularly any signs of a breakthrough on the shutdown, as well as upcoming speeches by Fed officials that may provide more clarity on the central bank’s policy trajectory.
Expected Ranges
- NZD/USD: 0.5650 - 0.5850 ▲
- NZD/EUR: 0.4800 - 0.5000 ▲
- GBP/NZD: 2.3250 - 2.3450 ▼
- NZD/AUD: 1.1200 - 1.1400 ▼
- NZD/CAD: 0.7950 - 0.8150 ▲