NZD/USD corrects from six-month high as US Dollar gains traction

• The New Zealand Dollar corrects after reaching a six-month high earlier in the week.
• New Zealand consumer confidence hits a 2021 high, supporting tightening expectations.
• The US Dollar finds support from producer inflation data and partial easing of political risks.

NZD/USD trades around 0.6035 on Friday at the time of writing, down 0.70% on the day, snapping a winning streak that began in mid-January. The pair pulls back after touching a six-month high at 0.6094 in the previous day, amid profit-taking and a firm rebound in the US Dollar (USD).

The New Zealand Dollar (NZD) remains underpinned by more constructive domestic fundamentals. The ANZ-Roy Morgan Consumer Confidence index rose to 107.2 in January from 101.5 in December, reaching its highest level since August 2021. This improvement in sentiment reinforces the view that the New Zealand economy is holding up better than expected, following last week’s upside surprise in inflation.

Against this backdrop, expectations of monetary tightening are gaining traction. The Reserve Bank of New Zealand (RBNZ) is widely expected to keep rates unchanged at its February meeting, but markets are increasingly pricing in the possibility of a first rate hike as early as July, with an even stronger likelihood of a move by September should inflationary momentum persist.

On the US side, the US Dollar manages to recover part of its recent losses. The announcement of Kevin Warsh’s appointment as head of the Federal Reserve (Fed), replacing Jerome Powell, has reassured some investors about the preservation of the central bank’s independence. At the same time, ongoing discussions in Congress have revived hopes of a budget agreement between Democrats and Republicans, temporarily reducing the risk of another institutional impasse.

US producer inflation data also provide support to the Greenback. The Producer Price Index (PPI) rose by 0.5% MoM in December, above expectations, while annual inflation stands at 3.0%. The core measure accelerates even more sharply, with a 0.7% monthly increase and annual inflation of 3.3%, signaling that upstream price pressures in the United States (US) remain firm.

Concerns over the Federal Reserve’s independence had weighed heavily on the US Dollar in recent weeks, contributing to its slide toward multi-year lows. While the prospect of a leader perceived as more institutional offers some relief, the political backdrop remains sensitive, with repeated criticism of monetary policy from US President Donald Trump continuing to fuel a risk premium.

In this environment, the pullback in NZD/USD appears to reflect a short-term adjustment rather than a clear shift in trend. The pair remains sensitive to changes in overall US Dollar sentiment and to monetary policy expectations, both from the Reserve Bank of New Zealand and the Federal Reserve, which are set to remain key drivers in the foreign exchange market in the weeks ahead.