New Zealand Dollar stays under pressure amid Fed hike bets as USD bulls await key data

• Following the previous day’s rebound from its post-RBNZ swing low, NZD/USD finds little scope to extend the recovery.
• Renewed demand for the USD puts spot prices under pressure as hawkish Fed expectations combine with geopolitical risks.
• The Advance US Q3 GDP report and US PCE figures are now in focus as traders await a fresh catalyst.

A modest rise towards 0.5635-0.5640 during Thursday’s Asian session gives way to selling in NZD/USD, with the pair now trading near 0.5620. The retreat interrupts the previous day’s recovery from a two-week low reached following the Reserve Bank of New Zealand (RBNZ) policy update. A sizeable increase in demand for the US Dollar (USD) leaves spot prices looking vulnerable.

Several supportive factors are helping the USD Index (DXY), a measure of the Greenback against a basket of currencies, recover ground after Wednesday’s post-FOMC correction from a two-week high. Speaking to reporters, US Federal Reserve (Fed) Chair Kevin Warsh said the central bank remained alert to persistent inflation and geopolitical risks. Alongside concerns over energy-led price pressures, those remarks reinforce the prospect of additional Fed tightening. Traders assign around an 80% probability to another increase in US borrowing costs in December, according to the CME Group’s FedWatch Tool. The prospect of higher rates, coupled with concerns that Middle East tensions could escalate further, lends support to the safe-haven dollar.

The Wall Street Journal reported on Tuesday that US officials had advised several Gulf Arab countries to prepare for a brief, intense military campaign against Iran after the November 3 midterm elections. According to Iranian Foreign Minister Abbas Araghchi, the armed forces are ready to defend the country, although Tehran will maintain close contact with intermediaries to allow diplomacy a chance. Intense fighting in Yemen between the Iran-backed Houthis and the Saudi Arabia-backed government also sustains the geopolitical risk premium, providing further support for the USD. By contrast, the New Zealand Dollar (NZD) remains under pressure following the RBNZ’s unexpected decision to leave interest rates unchanged, helping to limit gains in NZD/USD.

Before committing to fresh positions, however, USD bulls appear inclined to await clearer indications of the Fed’s policy direction. Attention therefore centres on the forthcoming US releases: the Advance Q3 GDP report and the Personal Consumption Expenditures (PCE) Price Index. These important figures will be instrumental in shaping the dollar’s next moves. Even so, the fundamental backdrop outlined above remains supportive of USD bulls. Together with the divergence between the Fed and the RBNZ, it suggests that NZD/USD’s path of least resistance is still lower.