Image © Adobe Images
U.S. equity markets maintain a powerful pull on the New Zealand Dollar.
The New Zealand Dollar will drop against the Pound, Euro and other major currencies if the Federal Reserve strikes a hawkish tone later today by warning it is not ready to cut interest rates anytime soon.
However, any developments that boost expectations for U.S. interest rate cuts - for example, Fed fears of an economic slowdown - would help U.S. equity markets and extend this week's nascent recovery by the Kiwi.
"Recent economic data has signalled a slowdown in the U.S., fuelling expectations that the Fed will implement three rate cuts in 2025, starting in June or July. The key question is whether Jerome Powell will adopt a dovish tone," says Ricardo Evangelista, Senior Analyst at ActivTrades.
Doing so would reinforce growing expectations for rate cuts, explains Evangelista, which would boost U.S. equities and sentiment-linked proxies such as NZD.
"Hopes of a continued equity rebound have stalled for now, with investors stepping away from risk assets ahead of today’s Fed decision," says Boris Kovacevic, Global Macro Strategist at Convera.
However, should the Fed's focus be on Trump's tariffs and their potential inflationary impact, it might strike a more 'hawkish' tone that pushes back against rate cut bets, leading to stock market losses.
Here, we would anticipate NZD to retreat to recent lows against most G10 peers.
The New Zealand Dollar has fallen sharply against the Pound and Euro amidst a selloff in U.S. stock markets, reflecting the currency's well-established 'high beta' to global investor sentiment.
However, NZD/USD has been trending higher in March as the U.S. Dollar is struggling amongst a belief that the U.S. economic exceptionalism of 2024 is rapidly fading.
This has come about as businesses and consumers grow more cautious amidst President Donald Trump's erratic approach to tariffs, which risk raising inflation and hampering businesses.
Above: NZD vs. GBP rises as the U.S. S&P 500 recovers (lower panel).
The Fed must give its verdict and try to steer markets accordingly. Given policy from the White House is so opaque, the difficulty facing the Fed is elevated.
The Fed will keep interest rates unchanged but release new economic and interest rate projections, which will sway markets.
Should Jerome Powell and his team indicate it is more concerned about the potential of an economic slowdown, then markets will increase bets for another rate cut before mid-year.
This would bolster stocks and the New Zealand Dollar.
However, should Powell focus on the inflationary risks of tariffs, the odds of such a cut would fade, stocks would falter, and NZD would be dragged lower again.
"The bar for rate cuts has crept higher, driven by concerns that inflation remains uncomfortably sticky. Selling resumed on Wall Street with the largest technology names being hit the hardest," says Kovacevic.