NZD/USD extends decline to near 0.5900 due to risk-off mood

• NZD/USD loses ground due to the increased risk aversion amid fears of an economic slowdown in the US.
• CME FedWatch tool indicates a 74.5% probability of a 50-basis point rate cut by the Fed in September.
• RBNZ is partly expected to deliver an early interest rate cut in August and fully expect one by October.

NZD/USD extends its losses for the second successive day, trading around 0.5930 during the European session on Tuesday. Growing Middle East tensions and fears of an economic slowdown in the United States (US) have dampened the appeal of risk-sensitive currencies like the New Zealand Dollar (NZD).

However, the downside of the NZD/USD pair could be limited as the US Dollar (USD) could struggle due to the expectation of a 50-basis point (bps) interest rate cut by the US Federal Reserve (Fed) in September. The CME FedWatch tool indicates a 74.5% probability of this relatively larger cut occurring at the September meeting, a significant increase from the 11.4% chance reported a week earlier.

According to Reuters, Federal Reserve Bank of San Francisco President Mary Daly expressed increased confidence on Monday that US inflation is moving towards the Fed's 2% target. Daly noted that “risks to the Fed's mandates are becoming more balanced and that there is openness to the possibility of cutting rates in upcoming meetings.”

In New Zealand, expectations of an early interest rate cut by the Reserve Bank of New Zealand (RBNZ) are putting pressure on the Kiwi Dollar, affecting the NZD/USD pair. This sentiment follows recent data indicating that the domestic annual CPI rate fell to its lowest level in three years for the June quarter. The RBNZ's next policy meeting is scheduled for August 14, with markets partly anticipating a rate cut at that meeting and fully expecting one by October.

Traders will likely monitor the release of China’s July Consumer Price Index (CPI) on Friday for new momentum. The CPI is expected to show a 0.4% year-on-year increase. A weaker-than-expected reading or signs of an economic slowdown in China could impact the New Zealand Dollar, given China’s close trading relationship with New Zealand.