The New Zealand dollar has declined after New Zealand inflation expectations decelerated in the fourth quarter. In the European session, NZD/USD is trading at 0.6114, down 0.25%. The New Zealand dollar declined by 0.40% after the inflation expectations release but has pared these losses.
New Zealand Inflation Expectations Ease to 2.5%
Inflation expectations are a key component of inflation trends, as entrenched expectations can result in higher inflation. On Tuesday, New Zealand inflation expectations fell to 2.5% in Q4, its lowest level in over two years and down from 2.76% in the third quarter.
The release should be an encouraging sign for the Reserve Bank of New Zealand, which has made the battle of inflation its top priority. Inflation is currently running at a 4.7% clip, well above the upper band of the one to three per cent target range. The RBNZ is concerned that inflationary pressures remain sticky and has signaled that it could raise interest rates.
The markets had priced in a rate cut the second half of the year, but “RBNZ speak” has pushed back against these expectations and a stronger-than-expected employment report last week have dampened these expectations. Investors have responded by pricing in a rate hike at 45% at the February 28th meeting and an 80% likelihood at the May meeting. Today’s inflation expectations release could ease pressure on the RBNZ to raise rates, and instead continue the pause in rates which has lasted since May.
In the US, the Federal Reserve has been pushing back against market expectations for a rate cut, and a March cut is now unlikely. On Monday, Richmond Fed President Thomas Barkin reiterated his concerns about lowering interest rates too soon, saying that there was a real risk of inflation moving higher.NZD/USD-4-Hour Chart
- NZD/USD is testing support at 0.6116. Below, there is support at 0.6072
- 0.6193 and 0.6237 are the next resistance lines