NZD/USD Stems Slide, Inflation Next

• New Zealand Services PSI eases to 48.8
• New Zealand inflation expected to ease to 0.5%

The New Zealand dollar has edged higher on Tuesday. In the North American session, NZD/USD is trading at 0.6086, up 0.17%.

New Zealand’s economy has struggled in the fourth quarter and a soft services release won’t help things. The Performance of Services Index (PSI) slipped to 48.8 in December, a four-month low. This followed a November reading of 51.1. A reading below 50 indicates contraction. The low reading was driven by concerns over the cost of living and the economic slowdown.

New Zealand releases fourth-quarter inflation on Wednesday. The consensus estimate stands at 0.50% q/q, compared to 1.8% in the third quarter. On an annual basis, inflation fell in Q3 from 6.0% to 5.6% and the downtrend is expected to continue in the fourth quarter with a reading of 4.7%.

Another drop in inflation will put pressure on the Reserve Bank of New Zealand to lower interest rates from the current benchmark rate of 5.5%. The RBNZ hasn’t raised rates since April but has pushed against market expectations for a rate cut and warned that rate hikes are not off the table. The RBNZ doesn’t meet until February 28.

The markets were exuberant in December when Fed Chair Powell jumped on the rate-cut bandwagon. That excitement has dissipated somewhat as a March rate cut is looking less likely. A month ago, a quarter-point cut in March was priced at 75%; that has dropped to 42% currently, according to the CME’s FedWatch tool. Fed members continue to raise doubts about a March cut, saying that the markets are getting ahead of themselves. US economic data has been solid, which means that the Fed isn’t under pressure to lower rates right away.

NZD/USD Technical

• NZD/USD is tested resistance at 0.6096 earlier. Above, there is resistance at 0.6119
• There is support at 0.6052 and 0.6029