The New Zealand dollar continues to move below the 0.5800 resistance area on Wednesday, with the downside move contained above the 0.5750-0.5760 area for now. A somewhat softer US dollar ahead of the Fed supports the New Zealand dollar holding near six-week highs.
The US dollar is falling against most of its peers, pressured by a moderate reversal in US Treasury yields, as investors unwind their positions ahead of the Fed’s decision.
The US central bank is widely expected to cut its benchmark interest rate by 25 basis points for the second time in a row this year, leaving it in a range of 3.50-3.75 within the closely divided Monetary Policy Committee.
“Hard easing” by the Fed may support the US dollar
Hence, the main attraction of this event will be Jerome Powell’s press conference, where the central bank chief is expected to present a hawkish view and may offer some support to the US dollar. The upbeat employment numbers seen on Tuesday and last week’s flat inflation numbers add reasons to think this way.
Moreover, investors will also be paying attention to the Dot Plot, which will contradict the market consensus for two or three more interest rate cuts in 2026.
The New Zealand dollar fell during the early Asian session as inflation data from China failed to encourage investors. China’s consumer prices accelerated to an annual rate of 0.7%, the highest level in nearly two years, but monthly inflation contracted and deflationary pressures deepened at the factory gate, fueling concerns about weak domestic demand.
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China is New Zealand’s largest trading partner, and these numbers offset the positive impact of the upbeat trade balance data and sharp increase in exports that the leading Asian economy showed earlier this week.
Federal Reserve Bank Questions and Answers
Monetary policy in the United States is shaped by the Federal Reserve Bank (Fed). The Federal Reserve has two missions: achieving price stability and promoting full employment. The primary tool for achieving these goals is adjusting interest rates. When prices rise too quickly and inflation is above the Fed’s 2% target, it raises interest rates, which increases borrowing costs throughout the economy. This causes the US dollar (USD) to strengthen because it makes the United States a more attractive place for international investors to park their money. When inflation falls below 2% or when the unemployment rate is very high, the Fed may lower interest rates to encourage borrowing, which affects the dollar.
The Federal Reserve (Fed) holds eight policy meetings annually, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC meeting is attended by twelve Fed officials – the seven members of the Board of Governors, the New York Fed president, and four of the remaining eleven regional Fed presidents, who serve one-year terms on a rotating basis.
In extreme cases, the Fed may resort to a policy called quantitative easing (QE). Quantitative easing is the process by which the Federal Reserve dramatically increases the flow of credit into a stuck financial system. It is a non-standard policy measure used during crises or when inflation is very low. It was the Fed’s weapon of choice during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy high-quality bonds from financial institutions. Quantitative easing usually weakens the US dollar.
Quantitative tightening (QT) is the reverse process of quantitative easing, where the Fed stops purchasing bonds from financial institutions and does not reinvest capital from bonds it holds outstanding, to purchase new bonds. This is usually positive for the value of the US dollar.
