New Zealand Dollar edges higher on softer US yields, Fed hike bets cap recovery

• The New Zealand Dollar edges slightly higher on Friday, benefiting from a temporary pullback in US Treasury yields.
• Lower Oil prices and strong demand at a US Treasury auction help improve risk appetite.
• Expectations of further US interest rate hikes continue to limit the Kiwi's recovery potential.

NZD/USD trades around 0.5605 on Friday at the time of writing, posting a modest gain of 0.06% on the day, but more broadly continuing to consolidate near its recent lows. The New Zealand Dollar (NZD) benefits from a slight improvement in market sentiment, supported by a temporary decline in US Treasury yields and easing Oil prices. However, persistent strength in the US Dollar (USD) limits the pair's upside momentum.

The improvement in risk appetite follows a US 30-year Treasury bond auction on Thursday, which attracted strong investor demand. The auction helped push US Treasury yields lower, providing some relief to risk-sensitive currencies, including the New Zealand Dollar.

Meanwhile, Oil prices retreated after US President Donald Trump stated on Truth Social that the United States (US) would not attack Iran before the November midterm elections. His comments temporarily eased geopolitical concerns following earlier reports suggesting that Washington was considering renewed strikes against Tehran.

However, the improvement in market sentiment remains fragile. Oil prices remain elevated, keeping inflation risks in focus and reinforcing expectations of further interest rate hikes by the Federal Reserve (Fed). The US Dollar Index (DXY), which measures the Greenback's value against a basket of six major currencies, rebounds to around 102.25 on Friday after hitting an intraday low of 101.92. Meanwhile, the 10-year US Treasury yield climbs back to 5.27% after briefly falling to approximately 5.22%.

The US monetary policy outlook remains a major obstacle to a sustained NZD/USD recovery. According to the CME FedWatch Tool, markets widely expect the Fed to keep interest rates unchanged within the 3.75%-4.00% range at its October 27-28 meeting, while pricing in an 85% chance of another rate hike in December.

Meanwhile, the latest US economic data released on Friday add to inflation concerns. The preliminary University of Michigan Consumer Sentiment Index declined to 46.3 in October from 48.1 previously, missing market expectations of 47.6. However, one-year inflation expectations increased to 4.7% from 4.6%, while five-year expectations rose to 3.5% from 3.4%.

On the New Zealand side, monetary policy divergence continues to weigh on the Kiwi. The Reserve Bank of New Zealand (RBNZ) maintains its Official Cash Rate (OCR) at 2.75%, significantly below the Fed's benchmark rate. This interest rate differential favors the US Dollar and reduces the relative appeal of the New Zealand currency.

Westpac expects the RBNZ to keep its benchmark interest rate unchanged at 2.75% in October, followed by a 25-basis-point increase in December and two additional hikes in early 2027. These projections suggest that monetary tightening in New Zealand could remain more gradual than in the US, limiting the NZD/USD pair's recovery prospects.

NZD/USD technical analysis

In the four-hour chart, NZD/USD trades at 0.5608, keeping a bearish near-term tone as it holds beneath the 100-period simple moving average (SMA) at 0.5655 and the 200-period SMA at 0.5759. A dense cap is forming overhead from the horizontal barriers at 0.5626 and 0.5649, while the Relative Strength Index (14) around 49 suggests neutral momentum that so far fails to challenge the prevailing downside bias.

On the topside, initial resistance is seen at 0.5626, followed by 0.5649 and the 100-period SMA at 0.5655, with higher hurdles at 0.5686 and 0.5735 before the 200-period SMA near 0.5759. On the downside, immediate support emerges at 0.5580, ahead of a lower floor at 0.5540, and a break beneath these levels would likely open the way to further weakness in the pair.

(The technical analysis of this story was written with the help of an AI tool. Know more.)