The NZD/USD exchange rate stabilized after crashing hard in the past few months. It was trading at 0.5600 on Monday morning, where it has been this year. This rate is down by 12% from its highest level in 2024. So, what next for the New Zealand dollar ahead of the upcoming inflation data?
New Zealand inflation data
The main catalyst for the NZD/USD exchange rate this week will be the upcoming New Zealand consumer inflation data.
Economists polled by Reuters expect these numbers to show that the headline CPI dropped from 0.6% in Q3 to 0.5% in Q4. They see the headline CPI falling from 2.2% to 2.1% on a year-over-year basis.
These numbers mean that New Zealand’s inflation is moving in the right direction after peaking at 7.3% in 2022. The inflation decline is partly because of the ongoing economic weakness and the elevated unemployment rate.
The most recent data showed that the country’s economy slumped by 1.1% in the second quarter and 1% in Q3. Two quarters of consecutive contraction are a sign that a country has moved into a technical recession.
New Zealand’s unemployment rate has also risen to 4.8%, validating the concept of the Philips Curve. Philips Curve is a theory that compares the performance of a country’s inflation and the unemployment rate. It says that the two usually move in the opposite direction.
Therefore, if the estimates are accurate or if the inflation figure is lower than the estimates, it will be a sign that the RBNZ will maintain a dovish tone. The bank has already slashed interest rates three times, bringing the official cash rate to 4.25%.
Analysts anticipate that the RBNZ will continue cutting interest rates this year. Most analysts see a 0.25% cut in February, followed by several more this year.
Read more: NZD/USD analysis: How low can the New Zealand dollar get?
Donald Trump inauguration
The NZD/USD exchange rate will also react to the upcoming Donald Trump inauguration on Monday.
Analysts anticipate that the new administration will be highly inflationary. Trump wants to slash taxes, deport millions of illegal aliens, and increase tariffs. At the same time, the recent California fires will lead to higher inflation rate in the country.
Recent data showed that the US inflation rate remained at an elevated level last week. These numbers showed that the headline Consumer Price Index (CPI) rose from 2.7% in November to 2.9% in December.
Core inflation, excluding the volatile food and energy prices, dropped slightly from 3.3% to 3.2%. While that drop was encouraging, it remains significantly above the 2% target.
The recent nonfarm payrolls data showed that the unemployment rate dropped from 4.2% to 4.1% as the economy created over 254k jobs.
Therefore, analysts anticipate that the Federal Reserve will maintain higher interest rates for a while. That explains why the 10-year and 30-year yields rose to 4.63% and 4.85%, respectively. Some analysts anticipate that the Fed may not even slash interest rates this year.
NZD/USD technical analysis
NZD/USD chart by TradingView
The daily chart shows that the NZD/USD pair peaked at 0.6375 in September last year to a low of 0.5545. It has remained below the key support at 0.5857, its lowest point in April and August last year.
The pair has moved below the 50-day moving average, most recently forming a falling wedge pattern. The Relative Strength Index (RSI) and the MACD indicators have formed a bullish divergence pattern.
Therefore, the pair will likely have a brief comeback as bulls target the 50-day moving average point at 0.5740. A drop below the support at 0.5547 will point to more downside.
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