NZD/USD moves above 0.5650 due to rising odds of Fed keeping rates unchanged in January

• NZD/USD receives upward support from the increased likelihood that the Fed will adopt gradual policy easing in 2025.
• The CME FedWatch tool indicates a nearly 90% probability that the Federal Reserve will keep interest rates unchanged in January.
• The NZD may depreciate as the RBNZ is widely expected to deliver a 50 basis point rate cut in February.

NZD/USD extends its gains for the second consecutive day, trading around 0.5660 during the Asian session on Monday. The NZD/USD pair gains ground as the US Dollar (USD) remains subdued following the Personal Consumption Expenditures Price Index (PCE) data from the United States (US).

The inflation report showed that core PCE inflation year-over-year, the Fed’s preferred inflation measure, rose steadily by 2.8% in November, slower than estimates of 2.9%. The monthly core inflation grew moderately by 0.1%, against estimates of 0.2% and the prior release of 0.3%.

Moderate growth in US inflation reinforced the market expectations that the Federal Reserve (Fed) will adopt a slower pace of additional cuts in 2025. According to the CME FedWatch tool, markets now anticipate a more than 90% probability that the Federal Reserve (Fed) will keep interest rates unchanged in January, maintaining the current range of 4.25%–4.50%.

The upside potential for the New Zealand Dollar (NZD) could be limited, as weaker-than-expected GDP data for Q3 has pushed New Zealand into its deepest recession since the initial COVID-19 slump in 2020. This has increased expectations for more aggressive monetary policy easing by the Reserve Bank of New Zealand (RBNZ). Markets have fully priced in a substantial 50 basis point rate cut at the RBNZ’s February meeting.

New Zealand's GDP contracted by 1.0% quarter-over-quarter in Q3, slightly improving from the revised 1.1% contraction in Q2 but worse than the anticipated 0.4% decline. On an annual basis, GDP shrank by 1.5% in Q3, a sharper decline compared to the previous 0.5% contraction and well below the expected 0.4% drop.