New Zealand Dollar stabilizes after US inflation data as RBNZ hold expectations cap upside

NZD/USD trades around 0.5650 on Friday, up 0.05% at the time of writing, as the New Zealand Dollar (NZD) remains under pressure despite a weaker US Dollar (USD) following the latest US inflation data.

The US Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve's (Fed) preferred inflation gauge, rose 4.1% YoY in May, matching market expectations. On a monthly basis, the PCE Price Index increased by 0.4%, below the 0.5% consensus forecast, reinforcing expectations that inflationary pressures may have peaked or are close to doing so.

Following the release, investors scaled back expectations for a 25-basis-point Fed rate hike at the July meeting. According to the CME FedWatch tool, the chance of a July hike fell to around 29.9%, down from 38.5% a week ago, putting pressure on the US Dollar.

However, the New Zealand Dollar has struggled to capitalize on the Greenback's weakness. Expectations that the Reserve Bank of New Zealand (RBNZ) will keep its Official Cash Rate unchanged at its July meeting continue to limit the Kiwi's upside potential. ASB Bank has dropped its forecast for a July rate hike and now expects the RBNZ to remain on hold before resuming gradual tightening from September, with the Official Cash Rate projected to peak at 3.25% in early 2027.

Markets also continue to view a September Fed rate hike as a realistic possibility, even though near-term expectations have eased following the PCE release. This divergence in monetary policy expectations between the two central banks could continue to shape NZD/USD price action in the coming days.