New Zealand Dollar remains under pressure, RBNZ rate hike bets cushion losses

NZD/USD trades around 0.5655 at the time of writing on Thursday, down 0.30% on the day. However, the pair limits its losses as the New Zealand Dollar (NZD) benefits from a sharp increase in expectations of further monetary tightening by the Reserve Bank of New Zealand (RBNZ).

Markets now price in around an 87% chance of a third RBNZ rate hike in October, compared with just 20% earlier this month. This rapid repricing of the monetary policy outlook provides support to the Kiwi, even as the broader market environment remains favorable to the US Dollar (USD).

Expectations of further tightening in New Zealand strengthened following comments from RBNZ Governor Anna Breman. The central bank chief warned that a sustained rise in Oil prices could push near-term inflation above the RBNZ's latest projections, increasing the need to maintain restrictive monetary policy.

NZD/USD nevertheless remains under pressure from the strength of the US Dollar. US Treasury yields extend their sharp rise, with the 10-year yield climbing to around 5.16%, its highest level since 2007, while the rate-sensitive two-year yield trades near 4.91%.

The rise in yields follows robust US activity data. The S&P Global Composite Purchasing Managers Index (PMI) unexpectedly climbed to 58.4 in September, its highest level in five years, reinforcing the view that the US economy remains strong enough to give the Federal Reserve (Fed) room to continue its fight against inflation.

The latest US labor-market data also support this scenario. Initial Jobless Claims edged slightly higher to 197K in the week ending September 19 from 196K previously, but remained below market expectations of 201K.

Against this backdrop, investors have increased bets on another Fed rate hike in October after the central bank delivered a 25-basis-point increase last week. According to the CME FedWatch tool, the chances of another rate increase stand at around 68%, up from 55% a week earlier.

Several Fed officials also maintain a firm stance on persistent inflation. Philadelphia Fed President Anna Paulson said on Thursday that the US central bank may need to raise interest rates again to bring inflation back toward its 2% target, while also highlighting the resilience of the economy.

NZD/USD therefore remains caught between opposing forces. A strong US Dollar and elevated US Treasury yields weigh on the pair, while the sharp increase in expectations of further monetary tightening in New Zealand helps limit the Kiwi's decline.

NZD/USD technical analysis

In the one-hour chart, NZD/USD trades at 0.5657, extending a bearish tone as it holds below the 100-period simple moving average (SMA) at 0.5707 and the 200-period SMA at 0.5727. The pair remains capped by nearby horizontal resistance at 0.5686, while the Relative Strength Index (14) slipping toward the oversold area around 29 reinforces persistent downside pressure rather than a sustained recovery attempt.

On the downside, immediate support is seen at 0.5649, ahead of a lower horizontal floor at 0.5626, which would come into focus on a fresh wave of selling. On the topside, a break above 0.5686 would be needed to ease the immediate pressure, with the 100-period SMA at 0.5707 and the 200-period SMA at 0.5727 forming a dense resistance band before the next barrier at 0.5735.