NZD/USD partially recovers after the release of lower-than-expected US Retail Sales

• NZD/USD makes a partial recovery in the minutes after the release of US Retail Sales data for May. 
• The data shows sales were lower than expected, and that preliminary estimates for April were over optimistic. 
• The New Zealand Dollar trades on the back foot amidst weaker services data and GDP. 

NZD/USD recovers almost a quarter of a percent to trade in the 0.6110s after the US Dollar (USD) softens, following the release of monthly US Retail Sales data, which shows shoppers tightened their belts in both April and May. 

Retail Sales rose 0.1% month-over-month in May but fell below the 0.2% forecast by economists. April’s flat reading, meanwhile, was revised down to a negative 0.2%, according to data from the US Census Bureau, released on Tuesday. 

Retail Sales ex Autos, declined 0.2% MoM – falling below the 0.2% consensus estimate and the downwardly revised 0.1% decline in April. The April figure itself was revised down from a positive 0.2% preliminary reading. 

Both the lower-than-expected readings for May and the downward revisions for April weighed on the US Dollar (USD), but lifted NZD/USD, which measures the buying power of a New Zealand Dollar (NZD) in terms of USD. The data indicates a slowdown in consumer spending in the US which will probably filter through to lower inflation, and lower interest rates. Lower interest rates negatively impact currencies as they reduce foreign capital inflows. 

Market expectations of the future course of US interest rates were revised down following the release. Prior to the release the probability of the Federal Reserve (Fed) making a 0.25% rate cut in September was 55%. After the release this increased to 60%, according to the CME FedWatch Tool, which uses the price of 30-day Fed Funds Futures to calculate its estimates. The probability that interest rates will fall by either 0.25% or 0.50% by September, meanwhile, rose to nearly 68%. 

The increased probabilities suggest the Fed could cut interest rates more than once in 2024. This comes despite the bank’s last set of forecasts in June penciling in only one 0.25% rate cut before year end. The hawkish forecast (of the view that interest rates will remain high) has been behind the USD’s appreciation over recent sessions and NZD/USD’s weakness. 

Recent commentary from Fed officials has backed the bank’s hawkish stance. Minneapolis Fed President Neel Kashkari said on Sunday that he thought it a “reasonable prediction” that the Fed would reduce interest rates only once this year.  On Monday, Philadelphia Fed President Patrick Harker added further support to the view after he said that keeping rates where they were for a bit longer would help get inflation down and mitigate upside risks.

The New Zealand Dollar, meanwhile, trades broadly weaker after data showed the New Zealand’s services sector slumped in May, hitting the lowest level since August 2021. In addition, GDP data for the country has shown two consecutive quarters of negative growth, meeting the definition of a recession. This, in turn, has increased bets the Reserve Bank of New Zealand (RBNZ) will cut interest rates in the near-term, with a 0.25% cut now fully priced in for the November meeting, according to Trading Economics.