The New Zealand dollar continues to lose ground on Thursday, in the after-shock of the FOMC policy meeting. In the North American session, NZD/USD is trading at 0.7005, down 0.60% on the day.
FOMC moves up timeline for rate hikes
It’s been all downhill for the kiwi since the FOMC shocker on Wednesday. Mirroring the movement of the Australian dollar, the NZD/USD plunged 0.99% on Wednesday and continues to fall sharply on Thursday. The pair is barely hanging above the symbolic 70-level, which was last breached in early April.
The Fed has fed the market a steady diet of declarations that it had no plans to veer from its ultra-dovish monetary policy. This message was reiterated as recently as late last week, after US CPI beat the consensus for a second month running. The Fed sought to curb any expectations that higher inflation would cause a shift in Fed policy.
Given this context, it’s understandable why the markets were expecting an uneventful FOMC meeting, in which the Fed would pay lip service to higher inflation, insisting that it was transitory and that the Fed was committed to its dovish stance.
In the end, the FOMC policy decision shook the financial markets and sent the US dollar sharply higher. The Fed provided an earlier timeframe for interest rate hikes, signalling on the dot plot that there could be two rate hikes in 2023. Prior to the meeting, the Fed had not planned to hike rates before 2023. Fed Chair Powell urged the markets to take the shift in the dot plot “with a grain of salt”, but investors weren’t listening, as US yields rose and the US dollar soared.
The Fed’s new message is that the economy is recovering faster than expected, and the Fed revised upwards its growth and inflation projections at the FOMC meeting. This could mark the start of a significant shift in policy, as the new buzzword investors may start seeing is ‘policy normalisation’.
There was positive news in New Zealand, as GDP for the first quarter was much higher than expected. GDP expanded by 1.6% q/q (0.5% estimate) and 2.4% y/y (0.9% estimate), a clear indication that New Zealand’s economy is performing well. Still, the strong GDP release was overshadowed by the FOMC tidal wave, sending the New Zealand dollar sharply lower.
NZD/USD broke through several support levels, causing a shift in the technical outlook.
- There is resistance at 0.7035, followed by 0.7082
- On the downside, the pair has support at 0.6955 and 0.6897
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