NZD/USD edges lower on Middle East risk aversion, RBNZ stance limits downside

NZD/USD edges lower on Thursday, trading around 0.5875 at the time of writing, down 0.47% on the day, as risk aversion dominates market sentiment. The pair remains confined within a narrow range seen in recent days, with investors reluctant to take strong directional positions amid ongoing geopolitical uncertainty.

Escalating tensions between the United States (US) and Iran continue to weigh on global markets, boosting demand for safe-haven assets. This dynamic supports the US Dollar (USD), which is also underpinned by higher US Treasury yields and reduced expectations for near-term rate cuts. The US Dollar Index (DXY) is moving higher, reflecting renewed interest in the Greenback.

On the macroeconomic front, recent US data present a mixed picture. Initial Jobless Claims rose slightly to 214K, above expectations, though the release had limited market impact. Meanwhile, economic activity showed signs of improvement, with the S&P Global Composite Purchasing Managers Index (PMI) rising to 52 in April from 50.3 previously, pointing to moderate expansion.

In New Zealand, recent inflation data continues to support the currency. The Consumer Price Index (CPI) increased by 3.1% YoY in the first quarter, confirming that price pressures remain above the Reserve Bank of New Zealand (RBNZ) target. This reinforces expectations of a sustained restrictive monetary policy stance, limiting the downside for NZD/USD.

According to Rabobank, this backdrop has led markets to price in significant rate hikes over a one-year horizon, although the bank suggests these expectations may be excessive. The institution notes that financial conditions have already tightened considerably, which could limit the central bank’s need to act aggressively.

Rabobank also highlights near-term downside risks for NZD/USD, driven by safe-haven demand for the US Dollar in case of further escalation in the Middle East war. However, the bank expects a moderate recovery in the pair later in the year, supported by the prospect of additional rate cuts from the Fed.