NZD/USD slumps from 0.6200 as focus shifts to RBNZ policy

• NZD/USD drops sharply from 0.6200 ahead of RBNZ policy.
• RBNZ Orr acknowledged risks connected to policy overtightening.
• Investors await US core PCE inflation data for fresh guidance.

The NZD/USD falls sharply to 0.6167 from the round-level resistance of 0.6200 in Monday’s European session. The Kiwi asset comes under pressure as investors shift focus towards the interest rate decision by the Reserve Bank of New Zealand (RBNZ), which will be announced on Wednesday.

The RBNZ is expected to maintain the Official Cash Rate (OCR) unchanged at 5.50%. Earlier, investors anticipated that the RBNZ could raise its key lending rates again to elevate downward pressures on sticky price pressures.

However, traders pared rate-hike expectations after RBNZ Governor Adrian Orr warned of risks of policy over-tightening. Adrain Orr said last week that the central bank needs to do more work to bring down core inflation but also acknowledged potential economic risks associated with further rate hikes. The NZ inflation is at 4.7%, more than double the required rate of 2%, which dents hopes of RBNZ pivoting to rare cuts, at least for now.

Meanwhile, the market mood remains slightly volatile as various economic data are set to release this week. The January United States core Personal Consumption Expenditure (PCE) inflation, scheduled for Thursday, will provide fresh insights on the interest rate outlook. The US Dollar Index (DXY) remains subdued around 103.80.

On Friday, New York Federal Reserve President John Williams said rate cuts could be announced later this year. William added, “My overall view of the economy hasn’t changed based on one month of data.” In the commentary from Fed Williams, the one month of data indicates surprisingly stick inflation data in January.