The NZD/USD pair is facing selling pressure above the crucial resistance level of 0.6250 as the market sentiment turns cautious. The US Dollar is bouncing back ahead of Fed Harker’s policy announcement, with traders expecting the Fed to further reduce interest rates by 75 bps for the remainder of the year. The US Dollar Index (DXY) has rebounded from its annual low, prompting a drop in the Kiwi asset. Investors are shifting focus to global PMI data to be released on Monday, with the S&P 500 opening on a bearish note, signaling a decline in risk appetite.
The Federal Reserve’s interest rate outlook has left market sentiment uncertain, with the Fed recently cutting its key borrowing rates by 50 bps to 4.75%-5.00%. Fed Chair Jerome Powell indicated that the policy-easing cycle would not be aggressive, but traders anticipate a more aggressive rate-cut cycle compared to other central bankers. The CME FedWatch tool suggests that the Fed will cut borrowing rates further by 75 bps in the remaining two meetings this year, with a projection of one more 50 bps rate cut.
The NZ Dollar could face continued selling pressure due to growing uncertainty and deepening growth concerns. The NZ economy contracted by 0.2% in the second quarter of the year, although this contraction was slower than the expected pace of 0.4%. With the economic outlook remaining uncertain, the pace at which the economy is contracting is a cause for concern for traders and investors.
In terms of risk sentiment, “risk-on” and “risk-off” are widely used terms in the financial world to indicate the level of risk that investors are willing to take. In a “risk-on” market, investors are optimistic and more willing to buy risky assets, while in a “risk-off” market, investors play it safe and opt for less risky assets. During periods of “risk-on”, stock markets and most commodities tend to rise, along with currencies of heavy commodity exporters. In a “risk-off” market, bonds, Gold, and safe-haven currencies such as the Japanese Yen, Swiss Franc, and US Dollar tend to benefit.
Major currencies that tend to rise during periods of “risk-off” include the US Dollar, Japanese Yen, and Swiss Franc, due to their status as safe-haven assets. On the other hand, currencies like the Australian Dollar, Canadian Dollar, and New Zealand Dollar tend to rise during “risk-on” periods, as their economies are heavily reliant on commodity exports. Understanding these risk sentiment dynamics can help investors make informed decisions based on market conditions and global economic outlook.
